Many individual investors try to do this by buying 99 shares of
Johnson & Johnson
to take advantage of the “single lot” rule in the company’s $40 billion swap offer
Kinfu
.
The potential return if all goes well is over $1,000.
However, this payoff is not guaranteed as it hinges on the near-term share prices of the two companies.
The opportunity arises because Johnson & Johnson’s (stock ticker: JNJ) swap offer for Kenvue (KVUE), which owns the consumer health business formerly owned by J&J, allows holders of fewer than 100 shares of J&J stock — or a single share — to receive the allotment. to Kenvue if they offer all of their shares.
Other J&J shareholders will likely be prorated, meaning they won’t get a full allocation of Kenvue. It’s hard to peg the proportion now but based on other companies’ exchange offerings in the past decade, it could be in the 20% to 40% range, which means J&J holders will only get 20% to 40% of their shares converted into Kenvue stock.
J&J’s tax-free swap offering is the largest ever and promises to attract significant interest from retail investors. J&J is one of the most widely owned stocks by individuals along with such blue chip companies as
Exxon Mobil
And
AT&T
.
J&J announced the exchange offer on July 24th, and it is set to expire on Friday, August 18th. J&J plans to exchange 1.5 billion shares of Kenvue, which owns Band-Aid, Listerine, Tylenol and other brands, for its own shares. The total number of Kenvue shares traded can reach 1.7 billion, or nearly 90% of Kenvue shares. J&J publicly announced Kenvue in May.
If J&J holders do nothing, they will not participate in the exchange offer. They need to voluntarily choose to participate. The stock exchange offering represented a giant J&J stock buyback of about 8% of its shares funded through the $40 billion Kenvue company.
J&J is offering holders an incentive to make the stock – known as a Wall Street split – about 7.5%, or roughly $107.50 in Kenvue stock for $100 of J&J.
Kenvue stock closed 0.1% lower on Wednesday, at $23.35, while J&J stock closed down 0.1%, at $173.07.
J&J plans to set the exchange ratio based on the volume-weighted average price of the two shares in the three-day period from August 14 to August 16. The exchange offer will expire on August 18 unless extended.
J&J gives an update about the stock exchange View siteAnd www.JNJSeparation.comabout the deal. The site states that if the offer was made based on the past three days’ trading of J&J and Kenvue shares, investors would receive approximately $185 in Kenvue shares for every J&J share based on a ratio of 7.8764 Kenvue shares for every J&J share.
For an investor who trades 99 shares, this results in a profit of about $12 per J&J share, or about $1,200. The investment will cost about $17,000.
Holders of single lots of less than 100 shares need to submit their entire investment to avoid a proportional split. Holders of more than 100 shares will be proportionately divided, even if they offer 99 shares or less on the exchange, based on Barron reading S-4 document Provided by Kenvue. Interested investors should look at question 21 on page 8 of the document.
Here are some of the risks if an investor purchases 99 shares of J&J and plans to make a Kenvue swap. If J&J stock drops next week, it’s going to get less Kenvue stock. And if Kenvue drops after the next week’s exchange rate is determined, the investor will receive a lower value.
One possible positive is that reviewers were buying J&J and shorting Kenvue to take advantage of the 7.5% spread. This has sent Kenvue down about 3% since the deal was announced in July while J&J is up about 2%. This could mean that Kenvue may rise once the trade is completed and the trade is incorrect.
when
General Electric
The act of offering exchange to
Financial synchronization
In 2015, GE stock outperformed prior to the deal and Synchrony outperformed GE immediately afterward.
Another wrinkle is that J&J caps the swap ratio at approximately 8.05 Kenvue shares for every J&J share. J&J holders making the exchange will receive less than 7.5% bonus if the ratio is above 8.05. The ratio is close to this maximum, standing at 7.8764 based on the last three days of pricing.
Retail investors who are waiting may be disappointed. While the offer expires on Friday, August 18th, brokerages may want retail investors to make their election a day or two early.
Individual brokerage firms have different processes for taking customer instructions, with at least one using an automated system, while others require investors to make their selection over the phone.
A financial advisor warns investors of call waiting times after spending some time on the phone this week with two brokerage firms.
There could be a crush next week as the deadline approaches. The Kenvue S-4 print document arrived in investor mailboxes only recently and it’s long and complex, running at more than 400 pages.
For longtime J&J investors, the choice is to keep J&J, one of the world’s largest healthcare companies that includes large pharmaceutical and medical device companies, or to swap with Kenvue, a leader in consumer health.
J&J trades at about 16 times 2023 earnings while Kenvue trades at about 18 times. J&J revenue yields 2.8% versus 3.4% for Kenvue. The case for Kenvue is that it has a stable business with well-known brands and is capable of achieving average — and possibly better — individual earnings growth in the coming years.
J&J absorbs liability in the US and Canada for Kenvue’s talc liabilities arising from sales of Johnson’s Baby Powder, while Kenvue retains the international legal risk on the product.
Moody’s Investors Service said earlier this year that external risks are not viewed as significant, but they are not easily hindered.
Many J&J holders want to trade in for long-term exposure to Kenvue, while others may want to make a quick buck on the deal.
Write to Andrew Bary at andrew.bary@barrons.com
Pharmaceuticals) Corporate/Industry News
