Johnson & Johnson (Ticker JNJ) recently revealed the final details of its highly sought-after exchange offer for Kenvue. The offer received overwhelming response from J&J investors, although only a fraction of their stock was ultimately converted into Kenvue shares.
According to Johnson & Johnson, the proration rate for the exchange was 23.2%, slightly lower than the preliminary estimate of 23.8% released earlier this week. Kenvue, a renowned consumer health company, is known for its popular brands like Band-Aid, Listerine, and Tylenol.
The voluntary exchange offer captured the attention of various J&J investors, including retail holders, institutional investors, and arbitragers. Its appeal stemmed from the roughly 7% discount on Kenvue stock offered exclusively to participants. The offer allowed J&J shareholders to submit any amount of their stock, depending on their preference.
Approximately 800 million J&J shares, equivalent to about 30% of the outstanding shares, were submitted for the exchange. Johnson & Johnson accepted around 191 million shares in exchange for 1.533 billion Kenvue shares. This translates to a ratio of approximately 8.03 Kenvue shares for each J&J share.
Notably, investors who held less than 100 shares of J&J stock and submitted all their shares were fortunate to be exempt from proration. This beneficial arrangement resulted in approximately 6.5 million J&J shares being tendered in so-called “odd lots” of less than 100 shares.
The Opportunity for Retail Investors
Kenvue shares have seen a significant rally since the exchange offer ended last Friday, presenting a promising opportunity for retail investors. This development was expected due to arbitrage activity leading up to the conclusion of the exchange offer. During this period, arbitrageurs bought Johnson & Johnson (J&J) shares and sold short Kenvue shares to capture the spread. However, this activity has now come to an end.
Furthermore, before the start of trading on Friday, Kenvue will be added to the S&P 500. As a result, index funds are likely to engage in significant buying of Kenvue shares on Thursday.
On Tuesday, Kenvue stock experienced a 3.7% increase, reaching $23.74 per share. Conversely, J&J stock saw a 0.7% decline, with a current trading price of $166.02 per share. Notably, J&J’s stock has fallen by approximately 3% this week.
During the exchange offer, each J&J share submitted by an odd-lot participant entitles them to approximately $190 worth of Kenvue stock. This represents a substantial premium compared to the current market price of J&J shares.
As a result of the exchange offer, J&J now holds approximately 9.5% of Kenvue’s shares, equivalent to around 180 million shares. In May, J&J transitioned Kenvue into a publicly traded company. Instead of conducting a simple spinoff in which existing J&J investors would have received Kenvue stock, J&J opted for a more intricate exchange offer or split-off. This approach involved a significant buyback of J&J shares financed through the issuance of Kenvue stock.
J&J intends to release updated financial guidance on Wednesday, August 30, which will include a new share count. It is estimated that the new share count will be approximately 2.4 billion. As for the company’s earnings guidance for 2023, it is expected to remain relatively stable, possibly aligning with the projected earnings per share of around $10.75 stated in the second-quarter earnings release in July. Although J&J will lose earnings from Kenvue, it is anticipated that the decrease in shared count will offset this loss and result in a continued strong position for J&J’s pharmaceutical and medical-device businesses.
J&J to Announce Quarterly Dividend Guidance
J&J is expected to provide guidance on its quarterly dividend, which currently stands at $1.19 per share. Despite the impact of the loss of Kenvue, there is a possibility that the dividend rate will remain unchanged due to a decrease in the number of outstanding shares.
Kenvue and J&J Yields
At present, Kenvue offers a yield of 3.4%, while J&J provides a yield of 2.8%.