Microsoft has withdrawn from a data center deal in Essex, dealing a blow to British company Nscale's multibillion-dollar listing plans.
As one of Nscale's two largest customers, the US tech giant recently notified Nscale that it will terminate the partnership agreement announced last year.
For Nscale, this represents a major setback: Microsoft (NASDAQ: MSFT) was originally the anchor tenant for the company's first UK data center in Loughton, Essex.
Even as the AI computing sector suffers a brutal selloff, Microsoft's decision could still disrupt Nscale's pace toward a Wall Street listing worth up to $35 billion (approximately £26 billion).
Last week, concerns that peer data center developers would struggle to repay debt amid persistently high interest rates and inflation sent related company shares tumbling broadly.
The final outcome of Nscale's listing attempt will be viewed as a key litmus test of investor appetite for heavily indebted AI companies; its success or failure will also affect the UK's overall positioning in this technology sector.
Several senior UK officials had packaged the Essex data center project as a flagship endeavor symbolizing Britain's AI ambitions, even lobbying local MPs to push the project through approval.
Microsoft's support for the project was part of the £22 billion UK investment pledge made during Donald Trump's state visit last year.
Sir Keir Starmer at the time called it a step toward Britain "becoming a global AI leader."
The data center site was to be equipped with thousands of high-end Nvidia AI chips and was originally scheduled to come online next year.
But the project has been delayed multiple times, with the grid operator telling Nscale that power connection is not expected until the 2030s.
After Microsoft canceled the partnership, the site is currently in limbo.
Microsoft was the only publicly signed customer for the project, having agreed to lease 23,000 Nvidia AI chips at the site.
The current financing logic of the data center industry relies heavily on AI giants signing long-term capacity purchase commitments.
Nscale's total contracted revenue stands at $103 billion, with more than 40% coming from Microsoft, though the UK project is believed to account for only a very small portion of that.
Anthropic is its other core customer.
Nscale's board includes heavyweight figures such as former Facebook executive Sheryl Sandberg and Sir Nick Clegg, with a previous private market valuation of $15 billion.
The company is planning to raise billions of dollars through a listing, with a potential listing valuation of more than double its private valuation, which would make it one of the UK's most valuable AI companies.
But the current plan collides with a massive selloff in the AI infrastructure sector, as market doubts about the sustainability of the data center construction boom continue to grow.
Tech analysis firm Gartner said last week that if the AI boom fails to deliver expected value, up to $3.5 trillion in related assets could be written down by 2030.
In addition, Nscale's flagship data center in Norway has also encountered delays, reportedly incurring substantial penalty fees.
Australian peer Firmus canceled its $20 billion IPO plan earlier this month, citing market conditions.
Other "neocloud" companies such as CoreWeave and Nebius have also seen sharp declines in their stock and bond prices.
Neocloud companies rely heavily on new rounds of investment and borrowing to maintain their construction pace, and rising market interest rates have further fueled concerns about the sustainability of their business models.
An Nscale spokesperson said: "We remain firmly committed to advancing the Loughton project and our UK market presence, and are seeking alternative power sources for the site while planning other expansion locations within the UK. Our partnership with Microsoft is strong and long-term, and this London-wide grid issue will not affect our other contracts."
Microsoft declined to comment on the matter.
Nscale was founded two years ago by Australian entrepreneur Josh Payne, a former coal miner, and the company had already faced scrutiny for signing large contracts without a track record in data center construction.
But Nvidia CEO Jensen Huang praised Nscale at an event in London on Wednesday: "This could be the most valuable startup born in the UK in the past decade."
High electricity prices and long grid connection waiting periods have been seen as major obstacles to building AI infrastructure in the UK.
In April this year, OpenAI paused plans to build a "Stargate" AI facility in Tyneside in partnership with Nscale, citing the UK's high electricity prices.
Nscale, backed by tech giants including Nvidia, positions itself as a UK "sovereign-grade" data center service provider.
Comments