Many individual investors are trying to do that by purchasing 99 shares of
Johnson & Johnson
to take advantage of the “odd-lot” rule in the company’s $40 billion exchange offer for
Kenvue
.
The potential payoff if things go right is more than $1,000.
That payoff, however, isn’t guaranteed because it hinges on the near-term stock prices of the two companies.
The opportunity arises because the Johnson & Johnson (ticker: JNJ) exchange offer for Kenvue (KVUE), which holds the consumer health business formerly owned by J&J, allows holders of less than 100 shares of J&J stock—or an odd lot —to get a full allocation of Kenvue if they submit all their shares.
Other J&J shareholders are likely to be prorated, meaning they won’t get a full allocation of Kenvue. It’s tough to peg the proration now but based on other corporate exchange offers in the past decade it could be in the 20% to 40% range, meaning participating J&J holders would get just 20% to 40% of their stock converted into Kenvue shares.
The tax-free J&J exchange offer is the largest ever and promises to generate significant interest from retail investors. J&J is one of the most widely held stocks by individuals along with such blue chips like
Exxon Mobil
,
AT&T
.
J&J announced the exchange offer on July 24, and it is due to expire on Friday, Aug. 18. J&J plans to exchange 1.5 billion shares of Kenvue, which owns Band-Aid, Listerine, Tylenol and other brands, for its own shares. J&J took Kenvue public in May.
If J&J holders do nothing, they won’t participate in the exchange offer. They need to voluntarily opt in to participate. The exchange offer amounts to a giant J&J stock buyback of about 8% of its shares financed with its $40 billion Kenvue holding.
J&J is offering holders an incentive to make the exchange—known as a split-off on Wall Street—of about 7.5%, or roughly $107.50 in Kenvue stock for $100 of J&J.
Kenvue stock closed down 0.1% Wednesday to $23.35 while J&J fell 0.1% to $173.07.
J&J plans to set the exchange ratio based on the volume-weighted average price of the two stocks in a three-day period from Aug. 14 to Aug. 16. The exchange offer will expire on Aug. 18 unless extended.
J&J is providing an update on an exchange offer website, www.JNJSeparation.com, about the transaction. The site shows that if the offering were made based on the past three days trading of J&J and Kenvue stock, investors would get about $185 of Kenvue shares for each J&J share based on a ratio of 7.8764 Kenvue shares for each J&J share.
For an investor exchanging 99 shares, this results in a profit of about $12 per J&J share, or about $1,200. The investment would cost about $17,000.
Holders of odd lots of less than 100 shares need to submit their full investments to avoid being prorated. And holders of more than 100 shares will be prorated, even if they submit 99 shares or less in the exchange, based on Barron’s reading of the S-4 document filed by Kenvue. Interested investors should look to question 21 on page 8 of the document.
Here are some of the risks If an investor buys 99 shares of J&J and plans to make the Kenvue swap. If J&J stock falls in the next week, he she will get less Kenvue stock. And if Kenvue falls after the exchange ratio is set next week, the investor will get less value.
One potential positive is that arbitragers have been buying J&J and selling short Kenvue to take advantage of the 7.5% spread. This has depressed Kenvue by about 3% since the deal was announced in July while J&J is up about 2%. This could mean that Kenvue may appreciate once the deal is done and that trade is unwound.
When
General Electric
did an exchange offer for
Synchrony Financial
in 2015, GE stock outperformed before the deal and Synchrony outperformed GE immediately thereafter.
Another wrinkle is that J&J is capping the exchange ratio at about 8.05 Kenvue shares for each J&J share. J&J holders making the exchange will get less than a 7.5% premium if the ratio is above 8.05. The ratio is getting closer to that cap, standing at 7.8764 based on the last three days of prices.
Individual investors who wait could be disappointed. While the offer expires on Friday Aug. 18, brokerage firms may want retail investors to make their elections a day or two earlier.
And individual brokerage firms have different processes for taking customer instructions with at least one using an automated system and others requiring that investors make their elections on the phone.
One financial advisor warns investors about call waiting times after spending time on the phone this week with two brokerage firms.
There could be a crush in the coming week as the deadline nears. The printed Kenvue S-4 document hit investor mailboxes only recently and it is long and complicated, running over 400 pages.
For longtime J&J investors, the choice is to hold J&J, one of the world’s largest healthcare companies with big pharmaceutical and medical-device businesses, or swap for Kenvue, a leading consumer health company.
J&J trades for about 16 times 2023 earnings while Kenvue trades for about 18 times. J&J yields 2.8% against 3.4% for Kenvue. The case for Kenvue is that it has a stable business with well-known brands and is capable of mid-single earnings growth—and possibly better—in the coming years.
J&J is absorbing liability in the U.S. and Canada for Kenvue’s talc liabilities stemming from sales of Johnson’s Baby Powder, while Kenvue retains international legal risk for the product.
The overseas risk isn’t seen as significant, Moody’s Investors Service said earlier this year, but it isn’t easy to handicap.
Many J&J holders want to make the swap for long-term exposure to Kenvue, while others may want to make a quick profit on the deal.
Write to Andrew Bary at andrew.bary@barrons.com
