Carnival Corporation & Plc (CUK) – Share Class Arbitrage – 15% Upside

Current Price: $26.01

Target Price: $30.15

Upside: 15%

Expiration Date: TBD

 

This is an unusual share-class arbitrage opportunity with a lack of clear catalyst.

Carnival Corporation & Plc is one of the largest global cruise line companies with separate listings in the U.S. and UK. Since the start of the covid crisis the spread between the two classes of shares exploded likely due to differences in index and retail investor fund flows. Arbitrageurs stand to generate 15% returns when/if the share prices of the two listings converge - historically the spread was minimal. Plenty of borrow is available for hedging.

Carnival has these public equity securities:

  • CCL - Carnival Corporation listed on NYSE with 933m shares outstanding.
  • CCL.L - Carnival Plc listed on the Londons Stock Exchange with 183.8m shares outstanding.
  • CUK - the ADR listing in U.S. of the UK CCL.L shares.

The spread between two classes of shares with similar economic value is not really unique something unique. Several examples of similar situations have already been published on SSI including BMW.DE, VWAPY, 690.D, DISCA/DISCK, Liberty's A/B shares, etc. However, what makes Carnival situation standout from the rest, is that the share price spread is between identical economic/voting interest common shares, both of which are also trading on the same market (CCL and CUK are listed on NYSE). Aside from the significantly higher liquidity of CCL shares (25x CUK and 40x CCL.L) the spread could possibly be explained by different index inclusions - CCL in S&P500, while CUK is part FTSE 250 which has much smaller following among index ETFs.

Overall, it is pretty clear that this situation is not likely to remain permanent and the discount should eventually converge. The main risk is the potentially prolonged timing as there is no clear catalyst to close the gap. However, with the broader cruising industry recovery expected in 2022, I think it's.

 

A bit of background on Carnival share classes

Carnival operates as a single company, whereas in fact, Carnival is two main legal entities - Carnival Corporation (US) and Carnival Plc (UK) combined together by the dual-listing (DLC) agreement since 2003. DLC includes numerous contracts and provisions such as dividend and liquidation distribution equalization, cross-co debt elimination, intercompany asset transfer and investment transaction provisions. Moreover, cash flows of one entity can be paid to cover obligations of another entity. This basically ensures that both entities operate as a single economic enterprise. Reported financial statements are also combined (10-K): "We believe that providing separate financial statements for each of Carnival Corporation and Carnival plc would not present a true and fair view of the economic realities of their operations".

Most importantly, DLC agreement foresees that shares of both the U.S. and UK companies are equalized - i.e. that they have identical economic interest and receive equal dividend distributions (investor relations page):

Shareholders of both Carnival Corporation and Carnival plc have the same economic and voting interest but their shares are listed on different stock exchanges and are not fungible. Carnival Corporation common stock is traded on the New York Stock Exchange under the symbol CCL. Carnival plc is traded on the London Stock Exchange under the symbol CCL and as an ADS on the New York Stock Exchange under the symbol CUK. Carnival is the only company in the world to be included in both the S&P 500 index in the US and the FTSE 250 index in the UK.

Because of this equalization, historically CCL and CUK/CCL.L listings traded mostly in line with each other - spread was minimal and fluctuated between +/- 2%. The CCL premium over CUK has somewhat increased in the Q4'19 to 5-6% and then blew up mid-March during the COVID-19 outbreak.

Leave a Reply