TheChek News Flow

Companies vie to create small plants for deployment to sites from data centres to oil platforms

Nuclear energy companies are trying to shrink reactors to the size of shipping containers in a bid to compete with electric batteries as a source of zero-carbon energy.

Led by Westinghouse, the race to develop “microreactors” is based on the notion they can replace diesel and gas generators used by everything from data centres to remote off-grid communities to offshore oil and gas platforms.

“Initially, the idea was there are parts of the economy that are very difficult to decarbonise, especially remote communities that depend on transportable diesel, which is very expensive,” said Jon Ball, head of Westinghouse’s eVinci microreactor programme. “But the level of interest has really expanded and we believe this is going to be a significant growth area.” 

The nuclear industry is enjoying a renaissance as governments and big tech companies search for clean sources of power to meet their climate commitments. Dozens of projects are already under way to develop small modular reactors, which have capacities of up to about 300 megawatts. 

Microreactors have a much smaller output of up to 20MW, enough to power roughly 20,000 homes, and are likely to operate like large batteries, with no control room or workers on site. The reactors would be transported to a site, plugged in and left to run for several years before being taken back to their manufacturer for refuelling. 

Westinghouse in December won approval from US nuclear regulators for a control system that will eventually allow the 8MW eVinci to be operated remotely. The reactor, which has minimal moving parts, uses pipes filled with liquid sodium to draw heat from its nuclear fuel and transfer it to the surrounding air, which can then run a turbine to produce electricity or be pumped into heating systems. 

“Our goal is to be able to operate autonomously from a central location where we can just simply monitor a fleet of reactors that are deployed around the world,” said Ball.

The reactor uses small quantities of ceramic-coated Triso fuel, which is designed to withstand extreme temperatures without melting down.

The eVinci is the first microreactor to complete engineering studies for a test programme — expected to start in 2027 — at the Idaho National Laboratory in the US, and Westinghouse recently signed a deal with Core Power, a UK start-up looking to develop nuclear power plants at sea. 

“It is on track for an operating licence at the US Nuclear Regulatory Commission . . . We think 2029 is the time it comes, which is as early as anything will come on to the market,” said Mikal Bøe, chief executive of Core Power. He added that he hoped the two companies could start building an order book in 2027 and 2028. 

Ball said two of the target markets for eVinci reactors were data centres and the oil and gas industry, both on and offshore. He said the ability to run several microreactors side by side would make data centres more resilient than with a single source of energy. 

Microreactors are also likely to be used by the mining industry, particularly to excavate cobalt, manganese and other critical minerals that are often located in remote locations, said Ian Farnan, a Cambridge professor of earth and nuclear materials.

He said the problem was “you have to cut 1,000 tonnes of rock for one tonne of product”.

“This will change how you run a mine. Currently, we use diesel. Aside from its cost and carbon intensity, the logistics of getting diesel to remote sites make a lot of these mines unviable. If you could install a reactor that lasts 10 to 20 years, you’ve got a power source sorted.”

Nasdaq-listed Nano Nuclear Energy has hired Farnan to help design a low-pressure-coolant microreactor that it hopes to bring to market by 2031.

Other companies that have established leading positions in the new microreactor industry include New York-listed BWX Technologies, which already builds nuclear reactors for US navy submarines and aircraft carriers, and X-energy, which raised $500mn in September from investors including Amazon and Ken Griffin, founder of the Citadel hedge fund. 

Both companies were selected for Project Pele, a US defence department commission for a portable nuclear reactor that could be deployed to any site on an aeroplane and run for several years before being moved on. 

But J Clay Sell, chief executive of X-energy, said the market for microreactors was “still emerging”. 

“We’ve probably invested as much as anyone in the sector,” he said. “But when you go down in size, the economics become much more challenged. You have to get to a greater level of scale for microreactors to become economic.”

Bøe said microreactors would be price-competitive once production lines were scaled up. “If you have an order book of 60 to 120 reactors, you see an economy of numbers,” he added, saying the aim was to produce electricity for somewhere between $100 and $150 per megawatt hour.

“That’s not grid-scale competitive, but it is very competitive for ports, terminals, petrochemical facilities, island locations, remote locations,” he said. “The cost of bringing diesel and gas into these places is prohibitively high.”

But there are questions over how to build, transport and run microreactors safely, said Ronan Tanguy, programme lead for safety and licensing at the World Nuclear Association. 

Regulators still have to draw up rules around whether microreactors can be operated remotely and how to make them safe from cyber attacks. Rules are also needed around transporting them, especially across national borders, and whether they should be fuelled in a factory or on site. Given their smaller size, they may also pose an easier target for nuclear fuel theft.

Westinghouse said the eVinci would pass the same aircraft impact assessment test that applies to larger reactors but Tanguy noted that many existing rules for reactors were either “disproportionate or not applicable for microreactors”. It would be very difficult to deliberately hit such a small target with an aircraft, he noted.

“The International Atomic Energy Agency is likely to issue high-level safety standards and those are usually taken into national regulation,” he said. “It is not going to be quick. If people want it to get done, yes it can be, but there’s lots of work involved.

FT : Playing the M&A Trump card & Activistist coming for Europe

Steel groups cry foul and bet on Trump

Nippon Steel has spent more than a year playing nice.

The Japanese group’s executives have courted Washington power-players and dined alongside Pennsylvania steelworkers in far-flung towns, all with one goal: to garner support for the company’s $15bn deal to buy US Steel.

But it’s now become a legal battle. They have sued President Joe Biden for allegedly blocking the transaction in exchange for union support in the swing state of Pennsylvania during last year’s election.

They’re betting Donald Trump and his incoming administration will approve their deal, even though he has repeatedly said he would block it.

What triggered the abrupt shift? Biden officially blocked the deal last Friday, citing national security concerns, after months of indicating he wanted the company to remain American-owned.

But Nippon and US Steel aren’t walking away from their merger.

Although Trump has vowed to block the deal, he’s notoriously mercurial, and has changed his mind on high-profile commercial issues before, such as banning TikTok.

Now, by suing Biden, the companies hope to be granted a do-over of the national security review by the Committee on Foreign Investment in the US, which couldn’t come to a decision by the December 23 deadline.

The two steelmakers are positioning themselves to benefit if Trump changes his mind.

“You could see a scenario where president Trump doesn’t want to defend the corrupt practices of his predecessor,” said a person familiar with the litigation. “In that scenario, this deal shouldn’t even end up on the president’s desk.”

But the companies face a time crunch. In his order blocking the deal last week, Biden stipulated they had 30 days to abandon the deal. The companies are hoping that either Cfius or the court will grant them more time to fight for the deal’s survival.

Europe, brace for the activists

Brace for impact: as European economies navigate political instability, slowing growth and unpredictable geopolitics, activist investors are gearing up to be even bolder and louder in 2025.

Some 86 per cent of corporates expect activism to tick up in 2025, according to a new study by top law firm Skadden Arps, with just under half expecting that increase to be “significant” — double the expectation from last year.

This follows years of consistent increases in the number of campaigns in Europe and a trend towards going public earlier, ratcheting up the pressure on boards.

Activists see Italian companies as most ripe for the picking, followed by the UK, Germany and France, according to Skadden.

While technology, media and telecoms were seen as offering the most opportunities in 2024, industrials are expected to be the big target in activists’ sights in 2025 — a major change from last year, when the sector was ranked fifth.

That prediction comes as Europe’s carmaking supply chains, for instance, are expected to continue to suffer this year.

“If you have different activists telling you . . . we’re going to target mainly industries and chemicals, it helps those companies to get prepared,” Armand Grumberg, the head of Skadden’s European M&A practice, told DD.

He added that while European companies previously lagged behind UK counterparts on planning to defend against activists “preparedness is now much, much higher than it used to be”.

Mid-sized companies with market value of €1bn to €2bn were also increasingly targeted in 2024. “When we speak to our mid-sized company clients, they say: ‘we’re not so much on the radar’. Well, guess what? You’re going to be,” he said.

That’s not to say all is smooth sailing for activists.

Bluebell Capital Partners — which made waves targeting oil company BP, pharmaceutical company GSK and yoghurt maker Danone — closed its activist hedge fund in December after struggling to raise funds.

And Paul Singer’s feared activist hedge fund Elliott Management has lost a string of top staff in its London office since autumn 2023, including star fund manager Nabeel Bhanji, who is decamping to Citadel.

But for European companies with vulnerabilities such as governance issues or non-core businesses creating drag: watch out.

Issuers pounce on surging investor demand for debt before Donald Trump returns to the White House

Corporate borrowers kicked off 2025 with a record $83bn in dollar bond sales, capitalising on buoyant investor demand to raise debt ahead of any market volatility sparked by Donald Trump’s return to power.

Borrowing in the US dollar investment-grade and high-yield bond markets reached $83.4bn by January 8, the highest year-to-date figure since 1990, according to data from LSEG.

High-grade borrowers have led the rush, including international banks such as BNP Paribas and Société Générale, car giants such as Toyota, and heavy machinery maker Caterpillar. US banks are expected to join the fray later in January after their earnings season.

“The market is strong, so there is no need for them to delay. They’re trying to come as early as possible,” said Marc Baigneres, global co-head of investment-grade finance at JPMorgan.

The rush of new debt sales comes as spreads — the difference between the yield on corporate debt versus safer government bonds — are near multi-decade lows, spurring companies to raise funds cheaply while they can.

“There are a lot of risks to spreads — inflation picking up, the economy slowing down, the Fed potentially pausing rate cuts and even moving on to rate hikes,” said Maureen O’Connor, global head of Wells Fargo’s high-grade debt syndicate.

The average US investment-grade spread sat at just 0.83 percentage points on Wednesday, not far above its narrowest point since the late 1990s, according to ICE BOFA.

January is typically busy for debt issuance, especially by banks. But the latest deal burst comes as companies lock in cheaper debt before Trump’s inauguration — with economists warning that the incoming US president’s telegraphed policies, including trade tariffs, could be inflationary.

On Wednesday, minutes from the last Federal Reserve meeting showed that officials were also concerned about inflation and wanted to be “careful” with the pace of future rate cuts.

Big borrowers are also under pressure to refinance quickly, with $850bn of high-grade dollar debt set to mature this year and another $1tn in 2026, according to Wells Fargo calculations.

“It’s a very attractive market environment” for borrowers, said Dan Mead, head of Bank of America’s investment-grade syndicate. “You continue to see healthy investor cash balances and receptivity to the new issues coming to market, and pricing at very attractive spreads that leads to issuers looking to go sooner rather than waiting.”

Edward Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle, said pension funds and insurance companies were “exceptionally predisposed” at the moment to buy debt.

Banks are typically first to take advantage of narrow spreads and are among the most active issuers so far. But market participants said non-financial borrowers could join the rush before the 10-year Treasury yield — a benchmark for global borrowing costs — rises any further. It now sits at about 4.7 per cent after climbing sharply in recent weeks.

“We have a couple of fairly critical risk events in January,” said O’Connor, pointing to US jobs data due on Friday, which will offer investors clues about the future path of interest rates, and Trump’s January 20 inauguration.

“We’ve heard quite a bit of rhetoric from the incoming administration on what the market could see quickly on the back of that,” O’Connor said. “I think there is a concern that that could catalyse another leg higher in Treasury yields.” Some “coupon-focused borrowers” — meaning companies focused primarily on the total yield they pay to investors — “are trying to get in front of that”, she added.

This week’s volumes, which have been condensed to just three days by shortened trading hours on Thursday, and Friday’s payrolls, follow on from a borrowing bonanza in 2024 — when global issuance of corporate bonds and leveraged loans hit a record $8tn.

While the current conditions remained favourable for sellers of debt, some buyers said they were now willing to sit on the sidelines until more alluring conditions emerge.

“The vast majority of deals are coming at levels that leave very little value on the table,” said Andrzej Skiba, head of BlueBay US fixed income at RBC GAM. “[It has] looked rather unappealing and we prefer to keep powder dry for a potential increase in volatility following the inauguration, as the market finds out this new policy mix and the Fed’s response to that.”

And rising corporate bankruptcies

Mag 7 Capex

Accounting is boring but important. Particularly important: the difference between a capital expense and an operating expense. A capital expense (buying a big piece of equipment, say) does not count directly against earnings on the income statement, as an operating expense (paying a salary, say) does. Instead, a capital expense appears on the income statement over time, in theory matching the drag on profits to the life of the capital asset. This spread-out expense shows up in a line called “depreciation”.

I see you sleeping at the back. But I drag you through this tiresome point because the most important companies in the world, the Magnificent 7 Big Techs, are running up a huge amount of capital expenditure, mostly on data centres for artificial intelligence. This is cash out the door today, but the expense will only appear in earnings per share over time. The AI arms race has not fully hit profits yet. The question is whether the market has digested the fact that it must do so before long.

Here is capex at the five of the seven that are, to greater or lesser extents, going bananas on capex (at Apple, capex is steady; at Nvidia, the capex money is coming in, not going out):

These are staggering numbers, and they are still growing.

Amazon looks like an outlier, but that is not quite true. One needs to scale the spending to the rest of the company’s financials. For example, one can look at capex as a percentage of revenue:

At Meta and Microsoft, one of every five dollars that comes in the door goes out as capex; at Alphabet, it is one in seven. And the trend is up (wondering about that big mountain of spending in 2022 at Meta? Remember the Metaverse?).

Now we have a sense of the scale of the spending. But what is important for our topic is the scale of the capital spending compared to what is currently being charged against profits. That is, what is capex relative to depreciation expense? As of the past 12 months, here is what that looks like:

Take Meta for example: depreciation expense is 9 per cent of revenue, capex 20 per cent. That means depreciation expense has to go up significantly in the coming years. That does not mean the group’s operating margins have to eventually fall by the difference (11 per cent); data centre capital expenditures will be spread over four to five years. But if the current level of spending keeps up, the drag on margins will be significant.

So, how much margin compression do Wall Street analysts’ estimates price in for these five companies in the next few years, as AI capex comes home to roost? None whatsoever. At all five companies, in fact, operating margins are expected to expand a bit in the next few years. This is possible, of course. Except for Tesla, all of these companies are increasing revenues quickly, and there is plenty of operating leverage in their models. But it won’t be easy. The optimism about Big Tech profits momentum overcomes all.

BigTech Capex

More on Big Tech capex

Several readers wrote in response to yesterday’s piece about capital spending and depreciation expense at the big US tech companies. The gist of their comments was that the market sees through accounting, and looks at cash flow. That GAAP profits of the Big Techs are not representative of how much they are spending doesn’t really matter.

This is right, but only to an extent. Here is free cash flow (operating cash flow less capital expenditures) at the five companies we looked at yesterday:

These companies (except for Tesla) still generate a boatload of free cash, even after shovelling billions at AI data centres. But notice that the trend in cash generation is flat to down. This is easier to see when you look at them in aggregate:

Now, one might look at this and say, “cash flow is cyclical, and the industry has been through down cycles before, like in 2021-2022, no big deal”. And there is some truth to that. But it is worth remembering that during that part of the cash cycle, all these stocks underperformed the market (and except for Microsoft, the underperformance was significant). 

Of course, the important thing is what happens next — how long the wild AI spending continues. It’s hard to say. Meta, Amazon and Alphabet have all suggested that capex will be higher in 2025 than in 2024. We’ll find out more from fourth-quarter earnings reports. 

In terms of earnings per share — as opposed to cash flow — the future is doubly hard to see, because we don’t know how exactly these companies depreciate data centre assets.

Ravi Gomatam of Zion Research Group, which specialises in accounting issues, emphasised to me that modelling future depreciation at big tech companies was highly complex. The companies provide only high-level information about their investments, and those high-level numbers can obscure a lot. Take data centre spending: what part is servers? The non-server infrastructure? The building? If treated individually, each of these would be depreciated at different rates; or they could be depreciated together. On top of that, there is the question of how depreciation rates might be changed, or writedowns taken, when computer equipment is made obsolete by innovation. A lot of assumptions and back testing is required to come up with a reliable projection.

What we can say for sure is that investment, depreciation and cash, and not just AI hype, will matter for tech investors this year.   

The future of QT

Quantitative tightening

Ten-year Treasury yields, at almost 4.7 per cent, are at their highest level since last April. No one likes this. Treasury investors have lost money. Equity investors will see a threat to stocks’ high valuations. Homebuyers foresee more expensive mortgages. And for government officials, the bond market is signalling discontent with fiscal policy.

The causes are mixed. The market seems to be absorbing recent strong economic news, which suggests that inflation might stay a bit high. Investors may be coming to terms with the possibility that full Republican control of the government might lead to bigger deficits. At the very least, the bond market is pricing in rising uncertainty. 

Structural changes in the Treasury market may have a role, too. The Treasury has been issuing a larger share of short-interest debt than in past years, which has made longer-duration Treasuries more scarce. This may have supported prices and driven down yields. Some observers have characterised this as a “secret” monetary policy tool — “quantitative easing by other means”. Treasury secretary Janet Yellen has denied this claim. Incoming Treasury secretary Scott Bessent is said to favour issuing more long-duration debt. It’s possible the market is anticipating Bessent’s approach and selling long bonds.

The rise in yields may subside. But if it persists, adding to the stress in the financial system, what will happen to monetary policy? If inflation does indeed hang around, the Fed will have to keep rates higher for longer. But what of quantitative tightening, or the effort to shrink the bank’s balance sheet after the Covid-19 pandemic response bloated it? Might the Fed halt it to reduce stress on the financial system? Might they even reverse it, and start buying Treasuries — quantitative easing — again?

Unhedged has not written about QT in a while for a simple reason: it’s been working. After QT contributed to 2019’s repo crisis, many feared that the newest QT cycle, started in 2022, may lead to similar panics. But things have been smooth, and there is good reason to think they will remain so.

For starters, QT does not seem to have had a major impact on long yields, so ending it would not give the Treasury market much relief. By buying up Treasuries, the Fed raises the price of Treasuries and depresses yields during quantitative easing (though the size of the impact is debated). At the start of this cycle, many feared that QT would have the opposite effect. But the impact appears to have been more muted: a paper by Wenxin Du, Kristen Forbes and Matthew Luzzetti estimates that it has boosted yields by roughly 8 basis points. 

Next, the Fed would only end QT if faced by a major liquidity breakdown in capital markets, and a jump in Treasury yields does not a crisis make. From Darrell Duffie of Stanford University:

The Fed only buys up securities when interest rates are 0 to stimulate the economy, or when the market for Treasuries gets clogged up. It’s not that rates are high or low, it’s that the market is not functional because there are too many investors selling Treasuries . . . [even] if Treasury yields get very high, the Fed won’t move unless there is market dysfunction. 

QT may be reaching its natural end soon, in any case. There is no “right place” to stop QT — the Fed is feeling its way, or “learning by doing”, in Ben Bernanke’s words. Ideally, QT stops at a point where banks reserves have normalised, but there is still enough liquidity in the system for markets to function smoothly. One approach to finding this level is looking at the sum of bank reserves held at the Fed and balances in the reverse repo window (RRW), or bank reserves plus “the excess reserves that banks can access if they are willing to pay market rates”, according to Joseph Wang of Monetary Macro. Together, the two represent the total amount of money available to the banks on short notice. When the repo crisis hit in 2019, that number was around 8 per cent of GDP. Getting close, but not too close to that number, is a reasonable goal. And we are probably not too far off: the sum of the RRW balance and reserves is around $3.4tn, and 8 per cent of Q3 GDP is $2.3tn. 

Most analysts we spoke with expect QT to end this year — but of natural causes, rather than market stress.

The $20 million deal gives the chip supplier a toehold in the life-sciences market, a strategy it plans to replicate in other industries

Advanced Micro Devices is investing $20 million in Absci, a drug-discovery company based in Washington state, in a move aimed at selling its artificial intelligence chips in the healthcare sector.

The deal is structured as a private investment in a public equity and includes an equity stake in Absci. AMD didn’t disclose the amount of its stake.

AMD, which is based in Santa Clara, Calif., said the investment and partnership between the two companies will help reduce hardware costs and optimize AI solutions for Absci.

The move is AMD’s first attempt to gain footing in life sciences with its AI chips, a space also targeted by its rival Nvidia. In 2023, Nvidia invested $50 million to boost Recursion Pharmaceuticals’ AI-based drug-discovery efforts and provided the underlying hardware for that work.

Mark Papermaster, AMD’s chief technology officer, said its relationship with Absci is the first of many efforts to make its graphics processing units, or GPUs, available to certain industries.

“We’re now expanding our focus into vertical markets and prioritizing healthcare, where we can immediately have an impact on society,” Papermaster said.

For AMD, investments in companies, including Absci, are a part of how it aims to make headway in the GPU market, which is dominated by Nvidia. AMD in December said it was part of a $333 million financing round for cloud company Vultr, for which it aims to become the “preferred” AI hardware provider.

As part of AMD’s investment in Absci, the company will move toward greater use of AMD’s GPUs, said the company’s founder and Chief Executive Sean McClain. Absci currently uses over 470 AI chips, most of which are Nvidia’s GPUs. It will start shifting some of its AI drug discovery workloads to AMD’s GPUs, he said.

Drug discovery efforts using AI require immense amounts of computational power—a constraint that Absci quickly ran up against, according to McClain. That is partly why AMD’s partnership and investment were attractive, he said, because it presented an opportunity to lower Absci’s costs of inference, or the costs of using AI models.

“We’re starting to see this big shift from designing drugs in the wet lab to now designing drugs on AI, and that means compute is extremely important. Our compute spend has skyrocketed,” McClain said.

Absci is also working with AMD to develop hardware and software that will better serve the healthcare sector and AI-based drug discovery work, he added.

The company has about 160 employees and has now raised a total of about $567 million. Absci said it plans to use the new funding to continue building its AI models and to keep working on its internal drug development efforts. Starting in the second half of the year, it said it would have results from a clinical trial for a drug targeting inflammatory bowel disease.

The new agreement puts a stronger focus on obesity and type 2 diabetes

Novo Nordisk NOVO.B 3.65%increase; green up pointing triangle expanded a deal with Valo Health to discover and develop treatments for obesity, type 2 diabetes and cardiovascular disease using human data and artificial intelligence.

The deal extends an agreement signed in 2023 and will see Valo become eligible for increased payments and funding.

Under the original deal, the companies agreed to develop up to 11 drug programs, primarily focused on cardiovascular disease, with Valo eligible to receive up to $2.7 billion in milestone payments, plus research and development funding and potential royalty payments.

The new agreement set out Wednesday expands the scope to put a stronger focus on obesity and type 2 diabetes and includes near-term payments to Valo of up to $190 million.

A further $4.6 billion in potential milestone payments will be made for up to nine new drug programs and Valo will also be eligible for more research and development funding and potential royalty payments.

The companies will continue to use Valo’s drug discovery and development platform that uses patient data and AI to generate new insights and translate them into potential therapeutics.

“We have already begun to realize the potential of combining the capabilities of Valo and Novo Nordisk to advance multiple AI-powered, human-centric programs, and we believe this partnership will help Novo Nordisk fulfill our ambition to expand the number of new drug programs we bring to the clinic,” said Marcus Schindler, executive vice president and chief scientific officer of Novo Nordisk.

The Danish pharmaceutical giant recently reported disappointing results of a closely watched clinical trial testing an experimental anti-obesity treatment that the company hoped would be its next big weight-loss product.