What happened
Carnival Corporation (CCL -0.56%) stock jumped on Monday after the cruise tours giant announced that it will continue selling shares in order to take advantage of an arbitrage opportunity...in its own stock.
As of 12:45 p.m. ET, Carnival stock is up 4.1%.
Image source: Getty Images.
So what
As Carnival stated today, it intends to "offer and sell shares of its common stock" -- as much as $500 million worth. These shares are listed on the New York Stock Exchange (NYSE) with the ticker symbol CCL. Carnival will then use the proceeds from the sale of these shares to turn around and buy shares of Carnival plc (CUK -0.11%) -- as Carnival Corporation is known when listed on the London Stock Exchange (LSE). Carnival didn't specify whether it will be buying back CUK shares on the NYSE as American depositary receipts (ADRs) or on the LSE, however.
Any money left over after this exchange will be used "for general corporate purposes."
Now what
Now here's why this plan will work for Carnival and why it's smart. Both CCL and CUK shares are essentially the same thing, representing equivalent shares of ownership in Carnival Corporation and equivalent claims on the company's future profits. But as of right now, a share of CCL costs $19.75, while a share of CUK costs only $18.37.
Yes, you read that right. Depending solely on how you spell the stock ticker, one share of Carnival stock may cost as much as 7% less than another.
Given this disconnect, it makes sense for Carnival to sell its own shares for the higher price and buy back its shares for the lower price -- and pocket the difference. It would actually make even more sense for Carnival to sell as many shares as possible at the higher price, and use the cash to buy up all of its shares at the lower price and pocket all the difference.
The longer this discrepancy in stock prices last, in fact, the greater the chance Carnival will decide to do just that.
