Johnson & Johnson (J&J), the healthcare giant, has launched an exchange offer for its shareholders to swap their J&J shares for shares of Kenvue Inc., its consumer health spinoff. The exchange offer is expected to reduce J&J’s stake in Kenvue from 100% to 20% or less, and allow J&J to focus on its core businesses of pharmaceuticals and medical devices.
How the Exchange Offer Works?
The exchange offer, which started on July 26 and will end on August 25, allows J&J shareholders to tender their J&J shares for Kenvue shares at a discount. The discount will be determined by a formula based on the volume-weighted average prices of both stocks during the three-day period before the expiration date. The exchange ratio will be announced on August 26, and the settlement date will be August 30.
The exchange offer is subject to a maximum limit of 2.1 billion Kenvue shares, which represents about 80% of Kenvue’s outstanding shares. If the exchange offer is oversubscribed, J&J will distribute Kenvue shares on a pro rata basis. J&J shareholders can choose to participate in the exchange offer or keep their J&J shares.
Why J&J Spun Off Kenvue?
Kenvue is the world’s largest pure-play consumer health company, with annual revenue of $15 billion and a portfolio of well-known brands such as Tylenol, Listerine, Johnson’s, Aveeno, and Neutrogena. J&J decided to spin off Kenvue in May 2023, after a strategic review of its businesses. The spinoff was intended to unlock value for both companies and allow them to pursue their own growth strategies.
According to J&J’s CEO Alex Gorsky, the spinoff will enable J&J to invest more in its innovation pipeline and accelerate its growth in pharmaceuticals and medical devices, which have higher margins and faster growth rates than consumer health. On the other hand, Kenvue will benefit from greater operational and financial flexibility, as well as the ability to pursue acquisitions and partnerships in the consumer health space.
What Investors Need to Know?
The exchange offer is an attractive opportunity for J&J shareholders who want to diversify their portfolio and gain exposure to the consumer health sector, which is expected to grow at a compound annual growth rate of 4.5% from 2023 to 20281. Kenvue has a strong competitive position in the industry, with leading market shares in many categories and regions. Kenvue also has a robust pipeline of new products and innovations, as well as a commitment to sustainability and social responsibility.
However, there are also some risks and challenges involved in the exchange offer. First, the exchange offer is taxable for U.S. federal income tax purposes, meaning that J&J shareholders who participate will have to pay taxes on the difference between the fair market value of the Kenvue shares they receive and the adjusted tax basis of the J&J shares they tender2. Second, the exchange offer is subject to market fluctuations and uncertainties, which could affect the value of both stocks and the discount rate. Third, Kenvue faces intense competition from other consumer health companies, as well as changing consumer preferences and regulatory pressures.
Therefore, J&J shareholders who are interested in the exchange offer should carefully weigh the potential benefits and risks of swapping their J&J shares for Kenvue shares, and consult their financial advisors before making any decision.