Jul 28, 2023
This week many clients received notice of an exchange offer from Johnson & Johnson. This alert likely came in email form from your account’s custodian (Charles Schwab, Raymond James, etc.). We have researched the opportunity being offered and at this time our recommendation is to decline the offer. If you choose to follow this recommendation no action is required by you (though you may continue to receive emails about the offer from your custodian).
Although the specifics of the offer itself were not known in detail until very recently, Johnson & Johnson’s spinning off of its consumer healthcare division has been in the process for some time. For context, we discussed the formation of Kenvue (the new company holding old Johnson & Johnson brands such as Tylenol, Motrin and Band-aid) on the January 24th version of our Daily Market Briefing. The newly spun-off company (ticker KVUE) began trading in early May.
In an effort to capitalize and sustain this entity, Johnson & Johnson (ticker JNJ) announced this week that they are offering holders of JNJ the opportunity to exchange those shares for shares of KVUE at a 7% discount. Based on the market close of July 27, 2023, this would imply that every JNJ share (closing price $173.69) could convert to 7.705 shares of KVUE (closing price $24.24) after discount.
Our decision to decline the offer ultimately comes down to the following factors:
Ultimately, if Kenvue had been operating independently for longer we would be better able to ascertain the value of the 7% discount on this portion of the portfolio, but at this time we do not see that discount as attractive enough to offset a lack of maturity for the standalone business or what we anticipate to be lower upside. In fairness, Kenvue has many qualities that we would find attractive, but we are concerned about the levels of debt the company has and would rather sit this one out.
If you are a holder of JNJ stock, you may opt out of the conversion by simply doing nothing. We will keep clients appraised of the offer should it change or fail to garner enough support.
Andrew’s career with Narwhal began as an intern during the summers of 2008 and 2009. He was hired in a full-time capacity in 2011. Andrew oversees the strategic direction of the firm and enjoys a role split between portfolio management, client engagement and operations. He previously served on the Advisory Board for the Mercer University Student Managed Investment Fund and completed the Charles Schwab Executive Leadership Program as a member of the 2019 class. Andrew and his wife Amanda live nearby in Marietta with their two kids.
At Narwhal Capital Management, you’re more than just a portfolio, and it’s not all about the numbers. Let’s start with a meeting about your needs and future goals.