Johnson & Johnson’s Kenvue Stock Swap Is a Good Deal for Investors

The net result Monday is that arbitragers are buying J&J stock and selling short Kenvue (KVUE) to try to lock in the roughly 7% spread.

J&J shares are up 1% at $171.82 Monday while Kenvue shares are down 2% at $23.52. The selloff in Kenvue could be creating a buying opportunity in its shares which are trading at close to their lowest level since the May IPO. The shares peaked at nearly $28.

The J&J announcement today wasn’t a surprise given that the company said on its earnings conference call last week that an exchange offer—or split-off—could be coming in a matter of days. Kenvue has provided the details in a long S-4 report filed this morning.

Under the terms of the deal, J&J holders have the option of swapping all, some, or none of their shares for Kenvue. The exchange offer expires on Aug. 18 with pricing determined on Aug. 14 to 16.

 J&J holders need to opt in to participate—if they do nothing, they will hold their J&J stock. The deal will be a tax-free exchange—it’s a prerequisite for the deal that J&J gets a favorable tax opinion. 

Many J&J investors may elect not to participate, deciding they want J&J’s pharmaceutical and medical-device focus rather than Kenvue’s consumer orientation. 

J&J opted for the more complicated exchange offer, whose details may confuse some retail investors, who make up a big chunk of its shareholder base.

J&J is offering to swap 1.5 billion Kenvue shares, or roughly 80% of Kenvue’s outstanding shares while retaining about 200 million shares which likely will be sold or spun off to J&J holders at a later time.

“There is little doubt that the distribution will be tax-free, subject to the requirement that JNJ establish that its retention of Kenvue stock is not part of a tax avoidance plan,” says New York tax expert Bob Willens.

A tricky aspect of the split-off is that there’s a good chance the offer will be oversubscribed—a 2021 Dupont offer to swap its shares for those in International Flavors and Fragrances was roughly two times oversubscribed. The result would be a proration, meaning that J&J holders who participate would get only part of their stock swapped for Kenvue. 

One exception is that investors who submit odd lots of less than 100 J&J shares will get full participation, a benefit to smaller J&J holders.

J&J could have opted for a simple spinoff and distributed more than half of a Kenvue share for each J&J share but decided the exchange offer was a better idea.

The pluses are that Kenvue may get a shareholder base that wants its stock and the exchange offer amounts to a giant buyback of J&J stock paid for with Kenvue shares. The negatives are the value leakage from the discount offered to J&J holders and the fact that arbitragers may reap considerable value in the transaction. 

AT&T

opted for a simple spinoff of its stake in

Warner Bros Discovery

in 2022 in part because it felt that arbs would get a disproportionate share of the value if it chose a split-off.

Kenvue, which owns such well-known brands as Tylenol, Listerine, and Band-Aid, last week reported its first results as a stand-alone public company and offered 2023 earnings guidance of $1.26 to $1.31 a share, sales growth of about 5% and it initiated a quarterly dividend of 20 cents a share. 

Kenvue is valued at about 18 times projected 2023 earnings and yields 3.4%. J&J yields 2.8%. Kenvue isn’t a high-growth company—earnings growth could run in the mid-single digits off the 2023 base in the coming years—but it has a stable and well-known group of consumer health brands. Kenvue trades at a discount to its closest peer,

Haleon

(HLN).

J&J has taken on Kenvue’s liability domestically for talc lawsuits related to Kenvue’s sales of Johnson’s Baby Powder. Kenvue has the international talc liability.

Moody’s

Investors Service wrote earlier this year that it doesn’t expect that overseas liability to be significant, writing that it assumes international litigation “will remain immaterial.”

Barron’s wrote favorably on Kenvue prior to its IPO and the split-off looks like an opportunity to pick up its shares cheaply due to arbitrage pressure on Kenvue stock.

—Angela Palumbo contributed to this article.

Write to Andrew Bary at [email protected]