What Investors Need to Know About the Coming Kenvue Exchange Offer

JNJ has yet to release the details of the offering but CFO Joseph Wolk said Thursday on the company’s earnings conference call that the tender offer could “occur as early as the coming days.” That is sooner than expected; Wall Street had figured that JNJ would deal with its 90% stake in Kenvue late in the year.

Lots of people will have to make a call on a potentially confusing exchange offer. JNJ has a huge base of retail investors, with one of the highest percentages among big companies in the

S&P 500
.

JNJ holds 1.7 billion Kenvue shares worth about $40 billion after taking the company public in May by selling about 300 million shares publicly.

There were two main options for JNJ after that deal given its intention to distribute its stake to shareholders. One choice was to pursue a simpler spinoff, in which it would distribute its stake in Kenvue on a pro rata basis.

That would mean that JNJ holders would get roughly 0.65 shares of Kenvue for each JNJ share, Barron’s estimates. We calculated this by dividing JNJ’s Kenvue stake of 1.7 billion shares by JNJ’s 2.6 billion shares outstanding 

JNJ stock was up 1.1% Friday to $170.19 while Kenvue was down 2% at $24.01.

Instead of a straight spinoff, the approach

AT&T

used in 2022 with its stake in

Warner Bros. Discovery

(WBD), JNJ will do a more complex voluntary exchange offer, which is known as a split-off on Wall Street. 

Based on prior split-offs, here’s how it may work. JNJ needs to give its holders a reason to swap their stock for Kenvue shares. To do so, it is likely to effectively offer JNJ holders a bonus that could be about 8% based on prior deals..

JNJ’s stock price is now about seven times that of Kenvue. To incentivize an exchange, it could offer JNJ holders about $184 of Kenvue stock, some 7.6 shares of Kenvue, for each share of the parent company.

The advantage of a split-off, which Dupont did with its stake in International Flavors and Fragrances in 2021, is that it amounts to a big buyback paid for by Kenvue stock. JNJ could retire about 8% of shares.

Another plus is that JNJ holders get the choice of keeping their JNJ stock or swapping all or part of their holdings on a tax-free basis for Kenvue stock.

Joe Cornell, who heads the research firm Spin-Off Advisors, says split-offs are less common than spinoffs. He likes split-offs because they reduce the parent’s share count and bolster earnings per share. 

Split-offs are “good for the investors normally as the parent incentivizes the split-off exchange by offering a decent discount to the investors interested in turning in their shares in the parent company for shares in the new spinoff,” he said.

Once the terms are announced, Wall Street arbitragers may get into the act and buy JNJ stock and sell short Kenvue stock to capture a spread. The tricky part is that the exchange offer could be oversubscribed, meaning that JNJ holders may get prorated, or be able to swap only a portion of their stock for Kenvue. The proration in the Dupont tender was about 50%.

JNJ said that one of the benefits of the deal is that Kenvue will have a holder base that “made an election to own its shares.” After a spinoff, there often is selling of the spun-off company by holders of the parent who don’t want to hold it.

The negative with an exchange offer is the value leakage that comes in the form of the effective discount that JNJ will have to accept to encourage its holders to make the swap for Kenvue.

AT&T felt that was too high a price to pay.

“The amount of discount that we would have to provide—we thought it was a bridge too far. It would have benefited short-term holders at the expense of our large retail shareholder base,” CFO Pascal Desroches said at the time. He felt that AT&T would have had to offer a double-digit discount to incentivize an exchange and it opted for a straight spinoff instead.

JNJ may have an easier time getting holders to make the swap because Kenvue is a stable business that owns such well-known brands as Band-Aid and Tylenol and Listerine. It pays a 3.3% dividend, higher than JNJ’s 2.8%

Kenvue stock was down 2% Thursday as investors anticipated an abundance of Kenvue stock, received through the exchange offer, hitting the market. The good news is that the exchange offer should clear the market and give Kenvue a group of investors who want to own its shares.

Barron’s wrote favorably about Kenvue before its IPO, citing its stable business, a valuation of about 19 times current-year earnings, a 3%-plus dividend yield, and the prospect of mid-single annual profit growth.

Write to Andrew Bary at [email protected]