J&J Holders to Get 8 Kenvue Shares for Each J&J Share in Exchange Offer

With Johnson and Johnson shares finishing Wednesday at $172.39, down 0.3% on the session, its holders who elect to make the exchange will get about $184 of Kenvue stock for each J&J share, based on Wednesday’s closing price for Kenvue, Barron’s estimates. Kenvue was down 1.4% to $22.93 Wednesday. 

The premium now is about 7%, which is in line with J&J’s plan to offer roughly $107.50 in Kenvue stock for every $100 in J&J stock. J&J offered the premium to give its holders an incentive to make the swap.

Kenvue is the consumer health business that owns such brands as Listerine, Band-Aid and Tylenol. It was taken public by J&J in May.

The deadline for J&J holders to make an election is Friday, but several brokerage firms want retail investors to give their instructions sooner. Merrill and Fidelity have set deadlines of Thursday, although Fidelity will handle instruction made through mid afternoon Friday on a best-efforts basis. Schwab retail customers needed to make an election by Monday.

J&J holders can swap all, some or none of their stock for Kenvue. If they make no election, they will retain their J&J stock.

The exchange offer probably will be oversubscribed. The result of that would be that J&J holders are prorated, meaning they will be able to exchange only a fraction of their shares for Kenvue. The current view on Wall Street is that the proration will be about 30%, meaning that a holder of 100 J&J shares would get 30 of them converted into roughly 241 shares of Kenvue and retain 70 shares of J&J stock. The proration likely will be announced early next week.

The exchange offer looks appealing for J&J holders because arbitrage activity has boosted J&J shares since the offer was unveiled on July 24 while depressing Kenvue stock. Arbs have been buying shares of J&J and selling short Kenvue to capture the spread. J&J holders essentially can get depressed shares of Kenvue at a discount.

RBC Capital Markets analyst Nik Modi wrote favorably on Kenvue Thursday.

“In a nutshell, we believe KVUE shares are undervalued relative to
its growth prospects. It is not often a high quality large cap multinational
trades at 13x EBITDA. We believe 15.5x EBITDA is more appropriate and
believe KVUE shares will migrate to that valuation as management delivers
on its guidance,” he wrote. Modi has an Outperform rating and $29 price target on the stock. Ebitda is earnings before interest, taxes, depreciation, and amortization.

 Kenvue shares are off about 5% since late July and are trading near a 52-week low, while J&J is closer to a 52-week high. And the exchange ratio of 8.03 is just below the maximum allowable ratio of about 8.05 under the offering. Barron’s wrote favorably on Kenvue at the time of its IPO.

Kenvue now trades for about 18 times projected 2023 earnings and yields 3.5%, while J&J fetches 16 times estimated 2023 profits and yields 2.8%.

J&J said it will retire about 191 million of its own shares in the exchange offer, assuming that it issues 1.5 billion Kenvue shares in the exchange. Wall Street is assuming that J&J issues 1.7 billion Kenvue shares, its entire stake of about 90%, due to strong likely demand for the exchange offer. That would result in more than 210 million shares of J&J being retired, Barron’s estimates, or about 8% of J&J’s shares.

It’s possible that holders of 25% or more of J&J shares will  participate in the exchange. 

Participation in the exchange offer could rise if Kenvue rallies Thursday and Friday because that would lift the value of Kenvue stock to be received by participating J&J holders.

The exchange offer amounts to a giant stock buyback funded by Kenvue stock. J&J opted for the more complex exchange offer, which is confusing many of its huge base of retail holders, rather than a straight spin-off in which J&J holders would have automatically received Kenvue stock.

Kenvue stock could rally once the exchange offer is completed as arbitrage activity ends and the company is added to the

S&P 500
index, which could come as early as next week.

Citi analyst Fillppo Falorni wrote in a note Tuesday that he anticipates that Kenvue could rally once the exchange offer is over. 

“KVUE shares have been under pressure from event-driven funds during the exchange tender period and we expect additional volatility during the averaging period (8/14-16), and on 8/21-22 as event-driven funds readjust their positions post-close,” he wrote. “We anticipate KVUE will outperform in the following weeks, as shares return to trading based on fundamentals. Additionally, we expect tailwinds from index-fund demand for KVUE shares following last week’s announcement by S&P Global that the company will be added to the S&P500 following completion of the exchange offer period.”

He has a $26 price target on the stock. 

Write to Andrew Bary at [email protected]