Many particular person buyers try to try this by buying 99 shares of
Johnson & Johnson
to benefit from the “odd-lot” rule within the firm’s $40 billion alternate provide for
The potential payoff if issues go proper is greater than $1,000.
That payoff, nevertheless, isn’t assured as a result of it hinges on the near-term inventory costs of the 2 corporations.
The chance arises as a result of the Johnson & Johnson (ticker: JNJ) alternate provide for Kenvue (KVUE), which holds the buyer well being enterprise previously owned by J&J, permits holders of lower than 100 shares of J&J inventory—or an odd lot —to get a full allocation of Kenvue in the event that they submit all their shares.
Different J&J shareholders are prone to be prorated, that means they gained’t get a full allocation of Kenvue. It’s powerful to peg the proration now however based mostly on different company alternate provides prior to now decade it may very well be within the 20% to 40% vary, that means taking part J&J holders would get simply 20% to 40% of their inventory transformed into Kenvue shares.
The tax-free J&J alternate provide is the most important ever and guarantees to generate important curiosity from retail buyers. J&J is among the most generally held shares by people together with such blue chips like
J&J introduced the alternate provide on July 24, and it is because of expire on Friday, Aug. 18. J&J plans to alternate 1.5 billion shares of Kenvue, which owns Band-Assist, Listerine, Tylenol and different manufacturers, for its personal shares. J&J took Kenvue public in Might.
If J&J holders do nothing, they gained’t take part within the alternate provide. They should voluntarily choose in to take part. The alternate provide quantities to an enormous J&J inventory buyback of about 8% of its shares financed with its $40 billion Kenvue holding.
J&J is providing holders an incentive to make the alternate—often called a split-off on Wall Road—of about 7.5%, or roughly $107.50 in Kenvue inventory for $100 of J&J.
Kenvue inventory closed down 0.1% Wednesday to $23.35 whereas J&J fell 0.1% to $173.07.
J&J plans to set the alternate ratio based mostly on the volume-weighted common value of the 2 shares in a three-day interval from Aug. 14 to Aug. 16. The alternate provide will expire on Aug. 18 except prolonged.
J&J is offering an replace on an alternate provide web site, www.JNJSeparation.com, concerning the transaction. The positioning reveals that if the providing had been made based mostly on the previous three days buying and selling of J&J and Kenvue inventory, buyers would get about $185 of Kenvue shares for every J&J share based mostly on a ratio of seven.8764 Kenvue shares for every J&J share.
For an investor exchanging 99 shares, this leads to a revenue of about $12 per J&J share, or about $1,200. The funding would value about $17,000.
Holders of wierd plenty of lower than 100 shares must submit their full investments to keep away from being prorated. And holders of greater than 100 shares will probably be prorated, even when they submit 99 shares or much less within the alternate, based mostly on Barron’s studying of the S-4 doc filed by Kenvue. buyers ought to look to query 21 on web page 8 of the doc.
Listed below are a few of the dangers If an investor buys 99 shares of J&J and plans to make the Kenvue swap. If J&J inventory falls within the subsequent week, he she is going to get much less Kenvue inventory. And if Kenvue falls after the alternate ratio is ready subsequent week, the investor will get much less worth.
One potential constructive is that arbitragers have been shopping for J&J and promoting brief Kenvue to benefit from the 7.5% unfold. This has depressed Kenvue by about 3% for the reason that deal was introduced in July whereas J&J is up about 2%. This might imply that Kenvue might recognize as soon as the deal is completed and that commerce is unwound.
did an alternate provide for
in 2015, GE inventory outperformed earlier than the deal and Synchrony outperformed GE instantly thereafter.
One other wrinkle is that J&J is capping the alternate ratio at about 8.05 Kenvue shares for every J&J share. J&J holders making the alternate will get lower than a 7.5% premium if the ratio is above 8.05. The ratio is getting nearer to that cap, standing at 7.8764 based mostly on the final three days of costs.
Particular person buyers who wait may very well be disenchanted. Whereas the provide expires on Friday Aug. 18, brokerage companies might want retail buyers to make their elections a day or two earlier.
And particular person brokerage companies have completely different processes for taking buyer directions with at the least one utilizing an automatic system and others requiring that buyers make their elections on the cellphone.
One monetary advisor warns buyers about name ready instances after spending time on the cellphone this week with two brokerage companies.
There may very well be a crush within the coming week because the deadline nears. The printed Kenvue S-4 doc hit investor mailboxes solely lately and it’s lengthy and sophisticated, working over 400 pages.
For longtime J&J buyers, the selection is to carry J&J, one of many world’s largest healthcare corporations with large pharmaceutical and medical-device companies, or swap for Kenvue, a number one client well being firm.
J&J trades for about 16 instances 2023 earnings whereas Kenvue trades for about 18 instances. J&J yields 2.8% in opposition to 3.4% for Kenvue. The case for Kenvue is that it has a steady enterprise with well-known manufacturers and is able to mid-single earnings development—and presumably higher—within the coming years.
J&J is absorbing legal responsibility within the U.S. and Canada for Kenvue’s talc liabilities stemming from gross sales of Johnson’s Child Powder, whereas Kenvue retains worldwide authorized danger for the product.
The abroad danger isn’t seen as important, Moody’s Buyers Service mentioned earlier this yr, but it surely isn’t simple to handicap.
Many J&J holders need to make the swap for long-term publicity to Kenvue, whereas others might need to make a fast revenue on the deal.
Write to Andrew Bary at [email protected]