Short seller says Csquare shares worth $0, cites legacy failures

Data center operator Csquare (CSQR) is trading at $14.90 after short seller Keith Dalrymple pegged the stock's long-term value at $0 in a report published this week. That's 29 percent below its July IPO price of $21, which itself missed the $23-$27 range Brookfield had marketed.

Dalrymple, CEO of New Hampshire research firm Dalrymple Finance, argues much of Csquare's portfolio comes from failed businesses and that its capital structure strips shareholders of any real claim on returns.

"We believe that the sales pitch is disconnected from fundamental realities and the capital structure relegates shareholders to a deeply subordinate position where value is more likely to be extracted via financing than created via returns," he wrote. "We believe the long-term value of CSQR shares is $0."

Where did the assets come from?

Csquare was formed in April 2024 through a merger of Cyxtera and Evoque, both owned by investment manager Brookfield. Brookfield built Evoque in 2019 from AT&T's data center and colocation assets. It later acquired Cyxtera — itself assembled from former Level3 and CenturyLink assets — out of bankruptcy proceedings.

The combined portfolio runs to more than 80 facilities and 3.5 million sq ft (325,160 sqm) with 400MW of capacity. The company went public on the New York Stock Exchange in July, raising over $1 billion against a $1.35 billion IPO target.

Dalrymple said the prospectus glosses over the assets' track record. "CSQR's prospectus does not disclose that the assets have a long, documented history of financial failure. More than half of the assets came from Cyxtera, which we wrote on before the stock crashed and the company filed for bankruptcy; the remainder were Brookfield-owned facilities, one group of which de facto defaulted on its debt."

What does this change for shareholders?

The core of the bear case is financing structure. Many of Csquare's best data centers have been bought through asset-backed securities (ABS), where loans are guaranteed by an asset's future performance — here, the data center itself.

Dalrymple's analysis shows most of Csquare's higher-quality assets, including roughly 95 percent of easily upgradable vacant space, are pledged to ABSs. Shareholders, in his reading, hold primary claims only on the lowest-quality space.

"We expect nearly all capex to be funded by CSQR (debt and equity), but shareholders will have only a residual claim on the financial benefits created in ABS-pledged facilities," he said.

He also attacks the growth plan. Csquare is selling investors a "business transformation" story: about $4 billion of investments at over 20 percent returns to nearly triple the sellable megawatts offered by its legacy colocation facilities. Dalrymple estimates returns on all-in costs will land below the cost of capital, making each new deployment value-destructive.

He expects the company will need to raise equity to fund its plans. "With capital deployment generating returns below the cost of capital, and ABS holders likely having primary claim on those returns, we believe that CSQR shares are worth nothing," he said.

What does the company say?

DCD has contacted Csquare for comment on the report. In an interview last year, CEO Spencer Mullee defended the portfolio, citing long-term clients and low churn from the Cyxtera era.

"Even through Cyxtera's bankruptcy, their customer churn was very low," Mullee said. "Data centers are a very sticky business. We still do significant enterprise business in that 1-5MW range — that hasn't changed — but now there are the AI guys, and we do some of that business too."

The company is targeting AI customers alongside its traditional enterprise colocation base. Investors now have two competing narratives: a management team banking on sticky enterprise demand and AI growth, and a short seller who says the capital structure has already handed the upside to lenders.