text size
J&J announced an exchange offer for Kenvue shares.
Scott Eells/Bloomberg
Johnson & Johnson is offering its investors an attractive offer to swap their shares for the bulk of its stake in Kenvue, the consumer company that J&J took public in May.
Investors in Johnson & Johnson (ticker: JNJ) may want to consider an exchange of their shares in a potentially $35 billion transaction, details of which were announced Monday morning. J&J is offering its holders the opportunity to receive Kenvue stock at a rate of $107 for every $100 in J&J stock, subject to a cap.
The net result on Monday is that arbitrageurs are buying J&J stock and selling short Kenvue (KVUE) to try to lock in the spread of around 7%.
J&J shares are up 1% to $171.82 on Monday, while Kenvue shares are down 2% to $23.52. The sell-off in Kenvue could create a buying opportunity for the company’s shares, which are trading near their lowest levels since the IPO in May. Shares peaked at nearly $28.
Today’s announcement from J&J came as no surprise, given that the company said in its earnings call last week that an exchange offer — or spin-off — could occur in a matter of days. Kenvue gave the details in a lengthy S-4 report filed this morning.
Under the terms of the agreement, J&J holders have the option to exchange all, some or none of their shares for Kenvue. The exchange offer expires on August 18th, the price will be fixed from August 14th to 16th.
J&J holders must opt-in to participate – if they do nothing, they keep their J&J shares. The deal will be a tax-free exchange – the deal is conditional on J&J receiving a favorable tax opinion.
Many J&J investors may choose not to invest, deciding that they prefer J&J’s focus on pharmaceuticals and medical devices over Kenvue’s consumer focus.
J&J opted for the more complicated exchange offer, the details of which may confuse some retail investors, who make up a large part of its shareholder base.
J&J is offering an exchange of 1.5 billion Kenvue shares, or approximately 80% of Kenvue’s outstanding shares, while retaining approximately 200 million shares that will likely be sold to J&J holders or spun off at a later date.
“There is little doubt that the distribution will be tax-free provided JNJ demonstrates that retaining Kenvue shares is not part of a tax avoidance plan,” said New York tax expert Bob Willens.
One tricky aspect of the spin-off is that there’s a good chance the offering will be oversubscribed — a 2021 offer by Dupont to swap its shares for shares in International Flavors and Fragrances was about twice as oversubscribed. The result would be a proration, meaning participating J&J holders would only exchange a portion of their shares for Kenvue.
One exception is that investors who submit odd amounts of fewer than 100 J&J shares will receive full participation, a benefit for smaller J&J holders.
J&J could have opted for a simple spin-off and allocate more than half of a Kenvue share for every J&J share, but decided the exchange offer was a better idea.
The upsides are that Kenvue may get a shareholder base that wants its shares, and the exchange offer amounts to a huge buyback of J&J stock paid for in Kenvue stock. The downsides are the loss in value from the rebate offered to J&J holders and the fact that arbitrageurs may derive significant value from the transaction.
AT&T opted for a simple spin-off of its stake in Warner Bros. Discovery in 2022, in part because it believed Arbs would receive a disproportionate share of the value in a spin-off.
Kenvue, which owns well-known brands like Tylenol, Listerine, and Band-Aid, reported its first results as a standalone public company last week, offering 2023 earnings guidance of $1.26 to $1.31 per share, revenue growth of about 5%, and a quarterly dividend of 20 cents per share.
Kenvue is valued at about 18 times forward 2023 earnings and yields 3.4%. J&J’s yield is 2.8%. Kenvue isn’t a high-growth company — earnings growth could be in the mid-single digits over the coming years from 2023 — but it does have a stable and well-known group of consumer healthcare brands. Kenvue is trading at a discount to its closest competitor Haleon (HLN).
J&J has assumed Kenvue’s domestic liability for talc claims related to Kenvue’s sales of Johnson’s Baby Powder. Kenvue has international liability for talc. Moody’s Investors Service wrote earlier this year that it does not expect foreign liability to be significant and said it expects international litigation to “remain immaterial”.
Barron’s wrote positively about Kenvue ahead of the IPO, and the demerger appears to be an opportunity to buy its shares cheaply given the arbitrage pressures on Kenvue stock.
—Angela Palumbo contributed to this article.
Write to Andrew Bary at [email protected]