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The Johnson & Johnson campus in Irvine, California.
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It’s crunchtime for investors in
Johnson & Johnson
who need to make a decision soon about whether to participate in J&J’s $40 billion exchange offer for shares in
Kenvue
,
the consumer health business that J&J took public in May.
The offer expires on Friday, Aug. 18, but several brokerage firms want Johnson & Johnson (ticker: JNJ) retail customers to give instructions before then. Charles Schwab and TD Ameritrade customers, for instance, need to make instructions by the end of Monday either by phone or online.
The pricing period for the exchange offer begins Monday and lasts through Wednesday with details available online. J&J shares are down 0.5% Monday to $172.97 while Kenvue (KVUE) stock is down 2.6% at $23.12. Based on current prices, J&J holders should get about eight shares of Kenvue for each J&J share. The exact ratio will be announced on Thursday.
J&J holders must elect to participate in the exchange offer, or split-off as the tax-free exchange is known on Wall Street. This makes it unlike a spinoff, in which holders of the parent company automatically get stock. J&J holders can swap all, part, or none of their holdings for Kenvue stock. If they do nothing, they will retain all their J&J shares. J&J has an investor Q&A online and exhaustive details are available in the 400-plus page Kenvue S-4.
Customers at Fidelity Investments have until the end of Thursday to make their instructions. The firm will handle directions on a best-efforts basis on Friday up to 2 p.m. ET. Fidelity customers need to have stock in their brokerage accounts to make the swap and this may be the case for other firms.
Merrill customers also have until the end of the day Thursday (5 p.m. ET). Barron’s wasn’t able to determine the deadline at
Morgan Stanley
Merrill and Morgan Stanley retail clients should contact their financial advisors if they want to participate. Fidelity customers can use the phone, while Schwab clients can make elections online or by phone.
“Don’t wait much longer if you want to exchange JNJ for Kenvue,” says Adam P. Cohen, a West Hartford, Conn. CPA. He has dealt with three brokerage firms for various accounts that hold Johnson & Johnson. He expects the instruction-making process could take more time on the phone later this week.
Under an offering announced on July 24, Johnson & Johnson is allowing its investors to exchange their stock for shares of Kenvue. J&J is prepared to exchange 1.5 billion Kenvue shares for J&J stock and potentially as many as 1.7 billion, or roughly 90% of Kenvue, which owns such well-known brands as Band-Aid, Listerine, and Tylenol.
J&J holders have a financial incentive to make the swap with the company offering Kenvue stock at an effective 7% discount to the market price. J&J holders stand to get roughly $107.50 in Kenvue shares for $100 of J&J stock.
The offering is expected to be oversubscribed and the result is that J&J holders should be prorated, meaning they will be able to swap only a part of their J&J shares for Kenvue. The proration is tough to predict but is expected to be in the 20% to 40% range, in line with the proration on prior deals like
General Electric
’s
(GE) exchange offer for shares of
Synchrony Financial
(SYF) in 2015 which had a proration of about 30%. The J&J exchange offer is the largest ever, double the size of the GE offer.
J&J holders of “odd lots” of 99 shares or less who agree to exchange all their stock will be able to fully participate in the offering and not be prorated. This feature could make the swap profitable for retail investors.
Beyond retail investors, the offering is attracting interest from Wall Street arbitragers who are buying J&J stock and selling short Kenvue to capture the spread. Index funds and active managers also are weighing whether to participate. One reason to make the swap is that Kenvue will be added to the
S&P 500
after the offer is completed.
Cohen says another reason for investors to participate is diversification. J&J holders now effectively own part of Kenvue. By making the election to exchange JNJ shares for Kenvue, shareholders can continue to hold a position in the spinoff. J&J will hold its large pharmaceutical and medical-device business after the deal.
Another reason to participate is that arbitragers have put pressure on Kenvue stock, which is down more than 5% since the plans for the offer were announced on J&J’s July earnings conference call. Kenvue stock is near a 52-week low and is down from a peak of about $28. Based on the GE precedent, Kenvue could rally after the exchange offer is completed.
Kenvue trades for about 18 times projected 2023 earnings and yields 3.5%, while J&J fetches about 16 times estimated 2023 earnings and yields 2.7%. The higher price/earnings ratio on Kenvue reflects the stability of its business and the durability of its brands.
One new wrinkle is that the exchange ratio is nearing a cap, meaning that if J&J appreciates much more, or Kenvue drops further, J&J holders will get less than $107.50 in Kenvue for every $100 of J&J stock. The cap is about 8.05 shares of Kenvue for each J&J share, and that ratio now stands at around 8 based on current prices, Barron’s estimates.
Write to Andrew Bary at andrew.bary@barrons.com
