News

J&J Preliminary Proration Estimate at 23.8%: What You Need to Know

1 2 3 4 5

4.5

Andrew R. Michaud

• August 21, 2023

J&J (ticker: JNJ) announced on Monday that the preliminary proration estimate is 23.8%. This means that J&J holders who took part in the exchange will see only 23.8% of their shares swapped for Kenvue (KVUE) stock. The remaining J&J shares submitted by J&J investors will be returned to them.

The exchange offer, which was introduced in late July, received substantial interest from J&J holders, with approximately 803 million J&J shares tendered. This represents around 30% of the healthcare giant’s outstanding stock.

One exception to the proration is for J&J holders who owned less than 100 shares and submitted all of them in the exchange offer. They will not be subject to proration. The “odd-lot” exception caught the attention of retail investors, as J&J offered approximately $107.50 in Kenvue stock for every $100 worth of J&J shares as an incentive to make the swap.

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

The proration turned out to be slightly lower than some experts on Wall Street predicted. According to _, estimates ranged from 25% to 30%. J&J holders had the option to submit all, some, or none of their holdings in the exchange offer. The final proration figure will be announced on Wednesday.

According to _, a J&J holder who submitted 1,000 shares in the exchange offer could expect to receive approximately 1,911 shares of Kenvue and retain 762 shares of J&J. For each J&J share accepted for exchange, participating J&J holders will receive roughly 8.03 shares of Kenvue.

In early trading on Monday, Kenvue stock rose by 1.7% to $23.25, while J&J stock declined by 2.1% to $168.82.

Wall Street Expects Kenvue Stock to Rally as J&J Faces Pressure

Many on Wall Street anticipated the current situation due to arbitragers buying J&J stock and selling short Kenvue stock to capitalize on the significant 7% discount that J&J offered on Kenvue stock in the exchange. As the arbitrage activity ceases, Kenvue's stock is now rallying while J&J feels the pressure. Kenvue stock traded around $25 prior to J&J's announcement of the exchange offer, and with the proration slightly lower than expected, there may be additional upward pressure on Kenvue stock.

Bullish Outlook for Kenvue

The bull case for Kenvue suggests that it will soon trade at approximately $25, driven by its upcoming inclusion in the S&P 500 index. The actual date of inclusion remains uncertain but an announcement by S&P Dow Jones Indices could happen as early as this week, according to Citi analyst Filippo Falorni.

Falorni's note from last week expresses expectations of increased volatility for KVUE shares during the averaging period and after the exchange offer due to event-driven funds readjusting their positions. However, he anticipates that Kenvue will outperform in the subsequent weeks as shares start trading based on fundamentals. Falorni sets a $26 price target for Kenvue stock and views the S&P 500 inclusion positively.

Details of the Exchange Offer

J&J plans to exchange approximately 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 retain a 9.5% stake in Kenvue, representing around 180 million shares.

Contrary to some expectations from Wall Street analysts, J&J decided against exchanging its entire stake of Kenvue, which amounts to about 1.7 billion shares. Instead, J&J will maintain an interest in the consumer-health company. It is anticipated that the remaining stake in Kenvue will eventually be distributed to J&J shareholders.

This exchange offer or split-off essentially acts as a substantial stock buyback for J&J, funded by Kenvue stock, with J&J retiring approximately 7% of its own shares.