Kenvue (NYSE:KVUE) stock is gaining modestly higher on Monday on the results of a share exchange with Johnson & Johnson (NYSE:JNJ), from which Kenvue was spun off. Specifically, Johnson & Johnson revealed that the exchange offer was oversubscribed. As a result, the ceasing of arbitrage trading prompted an initial upswing in KVUE stock while sending JNJ stock down.
According to the accompanying press release, under the terms of the exchange offer, 8.0324 shares of KVUE stock would be exchanged for each share of JNJ stock accepted in the agreement. Notably, exchange agent Computershare Trust Company reported that approximately 250.40 million shares were validly tendered and not validly withdrawn. However, the statement also noted that J&J intends to accept about 190.95 million of the tendered shares in exchange for the 1.53 billion shares of KVUE stock owned by J&J.
Due to the offer being oversubscribed, J&J is “accepting only a portion of the shares of its common stock that were validly tendered and not validly withdrawn, on a pro rata basis in proportion to the number of shares tendered.” In addition, shareholders who owned an “odd lot” of fewer than 100 shares of JNJ stock will “not be subject to proration.”
Initial estimates point to about 23.8% of the tendered JNJ shares being exchanged. The rest of the shares submitted by J&J shareholders will be returned to them.
KVUE Stock Rises on Arbitrage Trading
According to Barron’s, the preliminary 23.8% proration came in slightly lower than some analysts had expected. On Friday, the publication reported that estimates ranged between 25% and 30%. Based on the terms of the exchange offer, KVUE stock initially popped higher as an after-effect of arbitrage trading.
Per Barron’s, J&J offered roughly $107.50 in KVUE stock for $100 in JNJ stock shares as an incentive to J&J shareholders. To take advantage of the approximate 7% discount on KVUE stock, arbitragers had been buying JNJ stock and selling short KVUE. With this activity over, KVUE popped higher while JNJ suffered red ink. Further, with the slightly lower proration, the spinoff may still see upward pressure.
Another factor that may help lift sentiment for KVUE stock is the consumer health unit’s inclusion in the S&P 500. Barron’s notes that this status upgrade will occur at an “undetermined date after the exchange offer.” Some analysts believe that the inclusion may materialize as early as this week.
Indeed, Citi analyst Filippo Falorni believes that, once the drama over the exchange offer subsides, KVUE stock “will outperform in the following weeks, as shares return to trading based on fundamentals.” Falorni has a $26 price target for shares of Kenvue.
Why It Matters
Overall, TipRanks reports that KVUE stock carries a consensus moderate buy rating among Wall Street analysts. This assessment breaks down as three “buy” ratings and six “hold” ratings. In addition, the average price target for shares lands at $28.11, implying nearly 22% upside potential.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
