Jul 28, 2023

Johnson & Johnson Conversion Offer Details

Johnson & Johnson Conversion Offer Details

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:

  1. Kenvue is a new company: Although the brands held within the portfolio are well-established and in many cases well known, this is a new operating structure and not necessarily the most attractive portion of the old JNJ portfolio. We would like to see more aging on their guidance and expectations under this new organizational structure before taking on sizable positions.
  2. The 7% discount is not overly attractive: Shares must be exchanged by Mid-August, but based on yesterday’s closing price of $24.24 for KVUE stocks, the implied pricing would be roughly $22.54. The stock has traded below that level in its brief trading history and the stock IPO’d at a lower level. As such, we do not find a 7% discount to be an undeniable bargain.
  3. Tax implications still require consideration: Although the exchange itself is not a taxable event (per Johnson & Johnson) prior cost basis information will transfer forward. If we were to exchange all shares and immediately sell in an attempt to capitalize off the 7% discount, many of our clients would be left with smaller account balances after paying capital gains taxes.
  4. Large interest could create selling pressure: JNJ needs shareholders to exchange a little more than 460 million shares to KVUE but is offering more than 3x that amount. A large oversubscription is likely indicative of investors pursuing the discount and oversubscription could create downward pricing on KVUE stock which would negate the benefit of the 7% discount. We have seen this trading pattern with other entities who have gone through similarly structured spin offs.

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 Hall


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.

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