Genting Hong Kong Limited May Soon Book A Massive US$1.69 Billion One-Time Gain – What Does It Mean For Shareholders?

It might not be well known, but Genting Hong Kong Limited  (SGX: S21) is actually the company behind the popular Star Cruise brand of cruise liners.

But that’s not all that Genting Hong Kong does; the firm is actually one of the major investors in Norwegian Cruise Line Holdings Ltd, though the relationship between the two companies will be changed slightly going forward.

Earlier today, Genting Hong Kong announced that it is planning to sell a part of its stake in Norwegian Cruise Line in a secondary public offering. Norwegian Cruise Line is a NASDAQ-listed (NASDAQ’s a stock exchange based in the U.S.) cruise operator that runs its business mainly in the U.S. and Europe.

The nitty-gritty of the deal

Genting Hong Kong has the intention to sell 10 million shares of Norwegian Cruise Line. That amount of shares represent a 4.35% stake in the U.S.-listed cruise operator.

The deal would see Genting Hong Kong sell that 10 million block of shares to the underwriter of the deal, investment banking outfit Goldman, Sachs & Co., which would in turn sell the shares through a secondary offering to the public market.

There are other shareholders of Norwegian Cruise Line who are looking to sell an additional 10 million shares of the company to Goldman Sachs as well as part of the same deal.

Genting Hong Kong will be seeking a 2015 Disposal Mandate from its shareholders in a special general meeting that’s going to happen on 2 June 2015; the mandate, if obtained, can allow the company to consummate the sale.

What might change with Genting Hong Kong?

Upon closing of the sale, Genting Hong Kong expects to receive sales proceeds of close to US$546.1 million (after deduction of the estimated expenses) and a gain on disposal of about US$389.3 million.

The sales proceeds would be used for general working capital as well as to fund other new investments in the future; there’s no mention yet so far on what the new investments might be.

In any case, Genting Hong Kong would see its stake in Norwegian Cruise Line fall from 22% to 17.7% as a result of the secondary offering. Currently, the company is accounting for Norwegian Cruise Line as an associate. With the sale of the shares, Genting Hong Kong will be reclassifying Norwegian Cruise Line as an “available-for-sale investment” (AFS).

Based on accounting rules, available-for-sale investments are recorded at their market value (in this case, the value of Genting Hong Kong’s remaining 17.7% stake in Norwegian Cruise Line will be tied to the share price of the latter) while stakes in associates are recorded based on the historical cost paid.

As a result of the reclassification, Genting Hong Kong stands to reap a one-off gain of some US$1.69 billion, more than four times its net profit of US$385 million in 2014.

What does it mean for Genting Hong Kong’s investors?

The one-off gain might make Genting Hong Kong’s income statement for 2015 look fantastic, but it is the US$546.1 million in cash proceeds that investors should really be focusing on.

Even without the proceeds from the sale of Norwegian Cruise Line’s shares, Genting Hong Kong already has a great balance sheet; as of 31 December 2014, the company had a net-cash position (total cash minus total borrowings) of US$270 million. The cash proceeds would boost the firm’s net-cash position to more than US$800 million.

If the company has no new avenues in which to invest that cash, special dividends may even be on the way. But if no special dividends are forth-coming, then investors may want to keep a close eye on management’s intentions with that cash hoard.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.