Not known for making intelligent financial decisions, the Kingdom of Saudi Arabia has decided to throw its weight behind Carnival Corporation (NYSE: CCL). The repressive Middle-Eastern kingdom will purchase a staggering 43.5 million shares of the embattled cruise company giving it an 8.2% stake in Carnival.
As if Carnival’s reputation wasn’t bad enough, this association with a fundamentalist regime won’t do much good for its already tarnished brand image. Carnival is reeling from a series of fatal coronavirus disasters on its cruise ships, tax avoidance and a failure to obtain bailout funds from the U.S. government.
While investors may take Saudi Arabia’s investment in Carnival Corporation as a compelling vote of confidence, it’s probably just more in a long line of incompetence from the desert kingdom and its public investment fund. Saudi Arabia, along with its leader Mohammad Bin Salman, has a track record of poor financial decision-making.
In the fourth quarter of 2019, Saudi Arabia’s public investment fund sold 99.5% of its holdings in Tesla right before the stock rocketed to $900 — a move that could have cost them up to $4.5 billion in unrealized gains.
The country also IPO’d its state-owned oil firm Saudi Aramco for $1.7 trillion only to engage in an oil price war that tanked its value, leaving hundreds of retail investors holding the bag.
Now, the Saudi crown prince and his investment fund have their eyes set on Carnival Cruise. And it looks to be another high-profile flop.
According to a Monday filing with the SEC, the Saudis have purchased 43,508,895 shares of Carnival Corporation , giving them a substantial 8.2% ownership of the business.
The timing of this move is particularly stupid because last week Carnival announced plans to issue 65,500,000 in additional shares to raise capital. And it doesn’t look like the dilutive equity deal has closed yet. That means Saudi Arabia could see its stake massively diluted right after investing. Talk about a face palm moment.
Saudi Arabia doesn’t exactly have the best reputation. The repressive, fundamentalist kingdom is known to fund and promote extremists ideologies all over the world. Its new leader Mohammed Bin Salman was recently in hot water over the killing and dismemberment (with a bone saw ) of a dissident journalist in Turkey.
This isn’t exactly the sort of association any company needs at a time like this. Granted, Saudi Arabia isn’t going to force Carnival Cruise to observe strict Sharia law on its vessels. But with an 8.2% stake, the authoritarian regime will hold some sway over the governance of the company. And this probably isn’t a good thing.
Carnival Cruise is already dealing with the backlash from its reckless decision to continue running cruises in the middle of the coronavirus pandemic. Several of its ships, including the well-known Diamond Princess and Grand Princess, were the sites of massive coronavirus outbreaks. And another ship, the Ruby Princess, is now involved in a criminal probe in Australia after 342 passengers were infected and 11 died on board.
Reputational damage aside, the market seems to think Saudi Arabia’s Carnival Cruise investment could be a turning point for the stock. Shares rose 20% to settle at $10.21 on Monday. Other names such as Royal Caribbean and Norwegian Cruise also posted double-digit rallies on the day.
Despite the shifting sentiment surrounding the cruise industry, these companies are still in dangerous waters. Carnival Cruise will not be included in Trump’s stimulus package , and the company faces a growing mountain of long-term debt that it will have to reckon with long after the coronavirus crisis is over.