Carnival just made a truly fascinating financial move

Wall Street appears to be entering the summer slump, as the stock market was relatively sluggish to enter the new week. Advances for the S&P 500 (SNPINDEX: ^ GSPC) and Nasdaq Composite (NASDAQINDEX: ^ IXIC) helped them set new records, but the drops for the Dow Jones Industrial Average (DJINDICES: ^ DJI) showed the cross currents of the market.


Percent change (decline)

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Nasdaq Composite

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The cruise ship industry has been a focal point for retail investors for over a year now, as everyone tries to guess what the business will look like once the operators are back to full capacity. Actions of Carnival (NYSE: CCL) (NYSE: CUK) responded negatively to the company’s latest strategic move, but underlying what might have appeared to be pedestrian action was an interesting wrinkle that smart shareholders shouldn’t ignore.

Raise capital to return to shareholders?

At first glance, what Carnival announced on Monday seemed very much in line with what we’ve seen before in the cruise industry. The company said it would sell around $ 500 million in shares in the latest of many capital raising moves investors have seen since the pandemic began in early 2020.

Image source: Getty Images.

Most investors looked no further, seeing the move as a sign of weakness that once again reminded everyone of the heavy expense of cash that cruise passengers had to endure during their long period of inactivity. Indeed, other cruise lines also ceded ground that day, with Norwegian Cruise Line Holdings (NYSE: NCLH) and Royal Caribbean (NYSE: RCL) both fall by more than 6%.

But if you look at Carnival’s filing with the Securities and Exchange Commission, you’ll find an interesting use proposed for the $ 500 million in proceeds:

The company intends to sell the shares in the offering only when the ordinary shares of Carnival plc are trading on a UK market at a discount to the ordinary shares of Carnival Corporation. Therefore, Carnival Corporation and Carnival plc would derive economic benefit from the offering and use of the proceeds thereof.

Same deal, two prices

The brief refers to the fact that there are two ways to invest in Carnival. As described on the Investor Relations website, Carnival Corporation is listed in the United States under the symbol CCL and operates as a single economic entity with UK-based Carnival plc which carries the symbol CUK. However, their stocks are not fungible and therefore they often trade at different relative levels. Today, CCL closed above $ 26 per share, while CUK closed at $ 23 per share.

Some shareholders seemed to have gotten it, however. CUK shares only fell 4%, compared to a 7% drop for CCL shares. Eventually, Carnival’s efforts could completely narrow the gap between the two. If successful, this would return the relationship between the two stocks to what it looked like for most of the 2010s, when the disparities were narrower and often went the other way.

Technically, the two Carnival actions don’t offer arbitrage play, as there is no way to force Carnival to treat the actions as the same. Still, the cruise line has taken steps to clarify its intent with its latest offering, and investors shouldn’t make the mistake of thinking Carnival’s latest move has something to do with the fundamentals of the cruise industry.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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