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Carnival Sinks After Earnings Warning

The selloff came even though Carnival dropped its deal to acquire a large stake in Norwegian Cruise Line.

Updated from 12:03 p.m. EST

Carnival

(CCL) - Get Report

said Friday that it anticipated weakness in its second-quarter earnings, an announcement that sent the shares of the world's largest cruise operator tumbling 15%.

The selloff came even though Carnival dropped its deal to acquire a large stake in

Norwegian Cruise Line

Thursday evening.

Just six weeks after it reached a deal with Carnival,

Star Cruises

, Asia's largest cruise operator and Carnival's one-time partner in the acquisition, has now taken sole control of the parent company of Norwegian,

NCL Holdings

(NRW)

.

Shares of Carnival fell 4 1/2, or 17%, to close at 22 Friday. The Miami-based company's stock has dropped more than 40% since Feb. 3.

Carnival forecast Friday that its second-quarter earnings, at 31 cents to 32 cents a share, would be slightly lower than the year-earlier quarter because of higher fuel costs and slower booking patterns. Analysts polled by

First Call/Thomson Financial

had been expecting 37 cents, but that figure is sure to be revised downward. In the second quarter last year, Carnival reported earnings of $203.3 million, or 33 cents a share, on revenue of $796.1 million.

The company also estimated that earnings for the remainder of fiscal year 2000 would be in the range of $1.79-$1.83, with the bulk of the shortfall appearing in the second and third quarters. The First Call estimate is $1.91.

"The second-quarter guidance was worse than expected, though it was widely known that the number would be down year on year," said Scott Barry, an analyst at

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Raymond James

. "There's a more difficult pricing environment" for cruise ship tickets. He rates Carnival a buy and his firm has done no underwriting for the company.

"The back half outlook is more favorable," Barry continued. "They have now replaced certainty with a degree of uncertainty."

Carnival also reported its earnings for the first quarter ended Feb. 29. Net income rose 9% to $171.5 million, or 28 cents a diluted share, from $157.8 million, or 26 cents a share, a year earlier. The results matched the expectations of analysts polled by First Call. Revenue rose 10% to $824.9 million from $748.3 million a year ago.

Carnival and Star, based in Malaysia, dropped their agreement to acquire NCL jointly because of disagreements over the terms of the NCL

acquisition.

"It became very clear to us that the Star folks had clearly a different sense of how they wanted the business to run and they wanted us to take a more passive role," said Howard Frank, Carnival's vice chairman and chief operating officer, on a conference call. "Frankly, it

the acquisition did not make a lot of sense."

Star complained that Carnival wanted more control over Norwegian than its 40% stake would entitle it to have. Carnival then pulled out of the arrangement, leaving Star as the sole shareholder.

"The fact that they backed out of the deal is a positive," Barry said. "It didn't make a lot of sense if they didn't have control. And they wouldn't get the same kind of return."

Carnival and Star had agreed on Feb. 4 to acquire NCL in a joint bid valued at $1.9 billion -- $1.1 billion in equity and $800 million in assumed debt. Under the agreement, Carnival planned to spend $480 million to acquire a 40% stake in

Arrasas

, a Star vehicle used to pursue NCL, while Star would have retained the remaining 60%.

The decision to pursue a

joint bid signaled an extraordinary turn of events. At the beginning of December, Carnival made a hostile and unsolicited 30-kroner-a-share bid, valued at $1.7 billion, for NCL. To escape Carnival, NCL appealed to Star, which subsequently built up a 50.2%

controlling stake, shocking NCL. Carnival then

walked away from the negotiations, after Star announced it would make a mandatory 35-kroner-a-share offer for the company's remaining shares.

It looked as if Star had won until Carnival

offered a stepped-up bid of 40 kroners a share, or $2.1 billion, at the end of January. The move was surprising because Carnival had steadfastly

refused before then to increase its bid, saying a higher price would not create value for Carnival shareholders. But NCL then approached Carnival to save it from Star's clutches, after NCL shareholders converted various securities and issued new shares to whittle Star's stake down to 47%.

Star closed Friday trading on the Singapore bourse at $8.5 Singapore, up 5 cents, or 1%. Meanwhile, NCL closed Friday on the Norwegian bourse at 33 kroner and its American depositary receipts were trading at 15 1/4, down 5/16, or 2%.