J&J’s Kenvue Exchange Offer Is Substantially Oversubscribed. What Happens Now.

The exchange offer announced in late July was popular with J&J holders with about 803 million J&J shares tendered, or about 30% of the healthcare giant’s outstanding stock.

The exception to the proration is J&J holders who held less than 100 shares and submitted them all in the exchange offer. They will not be subject to proration. The “odd-lot” exception to the proration attracted considerable interest from retail investors since J&J was offering roughly $107.50 in Kenvue stock for $100 in J&J shares as an inducement for its holders to make the swap.

Kenvue, a consumer health business that holds such brands as Tylenol, Listerine, and Band-Aid, was taken public by J&J in May.

The proration was slightly lower than some on Wall Street expected, with Barron’s reporting Friday that estimates were in the 25% to 30% range. J&J holders could have elected to submit all, some or none of their holdings in the exchange offer. The final proration figure is due to be announced on Wednesday.

A J&J holder who submitted 1,000 shares in the exchange offer likely will get about 1,911 shares of Kenvue and retain 762 shares of J&J, Barron’s estimates. J&J holders who participated in the exchange offer will recent roughly 8.03 shares of Kenvue for each J&J share accepted for exchange.

Kenvue stock is higher in early trading Monday, rising 1.7% to $23.25, while J&J stock is off 2.1% to $168.82. 

This is what many on Wall Street expected because arbitragers had been buying J&J stock, and selling short Kenvue stock to take advantage of the roughly 7% discount on Kenvue stock that J&J offered in the exchange. Now that the arbitrage activity is over, Kenvue is rallying and J&J is under pressure. Kenvue stock had traded at around $25 before J&J announced plans for the exchange offer. With the proration slightly lower than anticipated, there could be additional upward pressure on Kenvue stock.

The bull case on Kenvue is that it will soon trade to around $25, helped by its inclusion in the
S&P 500 index
which will occurred at an undetermined date after the exchange offer. Some think an announcement by S&P Dow Jones Indices on the inclusion could happen as early as this week.

Citi analyst Filippo Falorni wrote in a note last week, “KVUE shares have been under pressure from event-driven funds during the exchange tender period and we expect additional volatility during the averaging period (8/14-16), and on 8/21-22 as event-driven funds readjust their positions post-close. We anticipate KVUE will outperform in the following weeks, as shares return to trading based on fundamentals.” Falorni has a $26 price target on Kenvue stock. He also cited the coming S&P 500 inclusion as a bullish factor.

J&J said it would exchange nearly 191 million shares of its stock for 1.53 billion Kenvue shares that it retained after taking Kenvue public in May. After the exchange, J&J will still hold a 9.5% stake in Kenvue, roughly 180 million shares. 

Some Wall Street analysts expected J&J to exchange its entire Kenvue stake, some 1.7 billion shares, in the offer, but it decided to retain an interest in the consumer-health company.

The exchange offer or split-off amounts to a giant stock buyback funded by Kenvue stock, with J&J retiring about 7% of its shares.

Corrections & Amplifications:

J&J hasn’t said what it plans to do with its remaining 9.5% stake in Kenvue. An earlier version of this article incorrectly said J&J plans to distribute it to shareholders.

Write to Andrew Bary at [email protected]