Carnival Just Made a Truly Fascinating Financial Move

Wall Street appears to be entering the summer doldrums, as the stock market was relatively lethargic to start the new week. Advances for the S&P 500 (^GSPC 0.17%) and Nasdaq Composite (^IXIC 0.60%) helped them set new records, but declines for the Dow Jones Industrial Average (^DJI -0.08%) showed the crosscurrents in the market.

Data source: Yahoo! Finance.

The cruise ship industry has been a focal point for retail investors for more than a year now, as everyone tries to guess what the business will look like once operators return to full capacity. Shares of Carnival (CCL 0.24%) (CUK 0.15%) responded negatively to the company's latest strategic move, but underlying what might otherwise have seemed to be a pedestrian action was an interesting wrinkle that smart shareholders shouldn't ignore.

Raising capital to return to shareholders?

At first glance, what Carnival announced on Monday seemed completely in line with what we've seen before throughout the cruise industry. The company reported it would sell about $500 million in stock in just the latest of many capital raising moves that investors have seen since the beginning of the pandemic in early 2020.

Image source: Getty Images.

Most investors didn't look any further, seeing the decision as a sign of weakness that once again reminded everyone of the extensive cash burn that cruise operators have had to endure during their long period of inactivity. Indeed, other cruise companies also gave up ground on the day, with Norwegian Cruise Line Holdings (NCLH -0.20%) and Royal Caribbean (RCL 0.34%) both falling more than 6%.

But if you look at Carnival's filing with the Securities and Exchange Commission, you'll find an interesting proposed use 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 in a United Kingdom market at a discount to shares of common stock of Carnival Corporation. As a result, Carnival Corporation and Carnival plc would derive an economic benefit from the offering and the use of proceeds therefrom.

Same business, two prices

The filing refers to the fact that there are two ways to invest in Carnival. As the investor relations website describes it, Carnival Corporation is listed in the U.S. under ticker symbol CCL and functions as a single economic entity with U.K.-based Carnival plc, which bears the ticker symbol CUK. However, their shares aren't fungible, and as a result, they often trade at different relative levels. Today, CCL closed above $26 per share, while CUK closed right at $23 per share.

Some shareholders seemed to get it, though. CUK shares fell only 4%, compared to a 7% drop for the CCL shares. Eventually, Carnival's efforts might get the gap between the two to close entirely. If successful, that would return the relationship between the two stocks to what it looked like throughout most of the 2010s, when disparities were narrower and often ran in the other direction.

Technically, the two Carnival stocks don't offer an arbitrage play, because there's no way to force Carnival to treat the shares as identical. Nevertheless, the cruise operator took steps to make its intent clear with its latest offering, and investors shouldn't make the mistake of thinking Carnival's latest move has anything to do with the fundamentals of the cruise business.