Johnson & Johnson Rips Off the Kenvue Band-Aid

July 20, 2023

Surprisingly early distribution, stretched valuation hit Kenvue’s shares

By guest author Aron Back from the Wall Street Journal. Aron Back   Aaron Back is Deputy Editor of Heard on the Street. He has written for the Heard column in both New York and Hong Kong on a range of topics including banks and financial firms, the consumer-staples sector and the Chinese economy. Before that, he was Deputy Bureau Chief for The Wall Street Journal and Dow Jones Newswires in Beijing.

Kenvue stock fell about 10 % at the open of trading Thursday before recovering some of its losses. Photo: BRENDAN MCDERMID/REUTERS

Johnson & Johnson JNJ 0.45%increase; green up pointing triangle just rained on the parade of its own consumer health arm, and it is unclear what comes next.

In early May, the healthcare giant sold shares in Kenvue KVUE 0.66 %increase; green up pointing triangle, which makes brands such as Tylenol, Band-Aids and Listerine, in an initial public offering. On Thursday, Kenvue reported its first quarterly results as a public company, and it beat analyst estimates on both the top and bottom lines. Shares were trading up slightly in premarket trading.

Then, J&J dropped a bombshell. It still holds around 90 % of Kenvue shares, and it had said previously that it plans to dispose of the rest in one of two ways: either through a spinoff, where J&J shareholders receive distributions of Kenvue stock, or a split-off, whereby J&J shareholders could choose to exchange their shares for Kenvue ones.

On Thursday, J&J Chief Financial Officer Joseph Wolk said the company would opt for the latter split-off option, and that “the launch of the tender could occur as early as the coming days.”

This suggested timing shocked investors. Kenvue stock fell nearly 10% at the open of trading, and was down around 3 % late Thursday morning. J&J had agreed in the IPO filing to adhere to a 180-day lockup on the sale or transfer of additional Kenvue shares, which would have limited any split-off until the end of October at the earliest. The company didn’t respond to questions about how or whether it has already secured underwriter permission to do so at an earlier date.

Should the tender indeed come soon, J&J shareholders will have to decide if they want Kenvue shares at the exchange ratio on offer. Despite its positive results on Thursday, the stock as currently priced doesn’t appear cheap.

At around USD 24 per share, Kenvue is trading above its IPO price of USD 22 and is somewhat richly valued at 18.9 times forward earnings based on FactSet estimates. Direct peer comparisons are difficult as there aren’t many pure-play consumer health brands on the market.

Kenvue, which makes brands such as Band-Aids and Tylenol, started trading in May. Photo: brendan mcdermid/Reuters


Companies such as Procter & Gamble and Colgate-Palmolive, which combine some consumer health products with other household brands, are trading at significant premiums to that. But Haleon, the consumer health company which was spun out of GSK last year and owns the Advil and Panadol brands, fetches 17.8 times forecast earnings. And Reckitt Benckiser, which owns medicine brands like Mucinex alongside other household products like Lysol, goes for just 16.8 times.

Kenvue shares may have to come down some more before the separation is complete. J&J’s comments on Thursday have only made things more complicated for its debut as a public company.