“Don’t wait too long if you want to replace JNJ with Kenvue,” says Adam P. Cohen, MD, of West Hartford, Conn. CPA. He has dealt with three different account brokerage firms that own Johnson & Johnson. He expects the instruction-making process to take more time on the phone later this week.

Under an offer announced July 24, Johnson & Johnson is allowing its investors to exchange their stock for Kenvue stock. J&J is willing to exchange 1.5 billion Kenvue shares for J&J shares and possibly as much as 1.7 billion, or roughly 90% of Kenvue, which owns popular brands like Band-Aid, Listerine and Tylenol.

J&J holders have a financial incentive to barter with the company offering Kenvue stock at an effective 7% discount to the market price. J&J holders expect to receive approximately $107.50 in Kenvue stock for $100 in J&J stock.

Oversubscription is expected to increase supply, with the result being that J&J holders will have to be prorated, meaning they will be able to swap only a portion of their J&J stock for Kenvue. Proportionality is difficult to predict, but is expected to be in the 20% to 40% range, in line with the proportionality in previous deals such as

General Electric
‘s

(GE) stock exchange offer

Financial synchronization

(SYF) in 2015, which proportionately reached 30%. J&J’s exchange offering is the largest ever, and is twice the size of GE’s offering.

J&J holders of “single lots” of 99 shares or less who agree to exchange all of their shares will be able to fully participate in the offering and will not be prorated. This feature can make the barter profitable for retail investors.

Far from retail investors, the show attracts interest from Wall Street editors who buy J&J stock and short Kenvue to get the spread. Index funds and active managers are also considering whether or not to participate. One reason to do the swap is that Kenvue will be added to the

Standard & Poor’s 500
After the show is complete.

Cohen says diversification is another reason investors should get involved. J&J holders now effectively own a portion of Kenvue. By making the election to exchange JNJ shares for Kenvue, shareholders can continue to hold a position in the spin-off company. J&J will retain its large pharmaceutical and medical device business following the transaction.

Another reason to get involved is that reviewers have put pressure on Kenvue stock, which is down more than 5% since announcing plans to show up on J&J’s July earnings conference call. Kenvue stock is near a 52-week low and is down from a peak of about 28. dollars. Based on GE’s precedent, Kenvue could soar after the swap offering is completed.

Kenvue is trading at about 18 times estimated earnings for 2023 and yielding 3.5%, while J&J is bringing in about 16 times estimated earnings for 2023 and yielding 2.7%. Kenvue’s high price/earnings ratio reflects the stability of its business and the durability of its brands.

One new wrinkle is that the exchange ratio is close to a cap, which means that if J&J rises in value much more, or Kenvue falls even more, J&J holders will receive less than $107.50 in Kenvue for every $100 of J&J shares. The cap is about 8.05 Kenvue shares per J&J share, and that ratio is now about 8 based on current prices, Barron estimates.

Write to Andrew Bary at andrew.bary@barrons.com