Johnson & Johnson: Split Off of Consumer Unit Kenvue Likely Final Step in Unit’s Divestment

Johnson & Johnson announced the next step in the split off of the consumer healthcare group Kenvue KVUE by offering at least 80.1% of the shares of Kenvue through an exchange offer. We don’t expect this step to have a major impact on J&J’s fair value estimate or wide moat rating. We also don’t expect any material changes to Kenvue’s fair value estimate or wide moat rating. We expect the Kenvue divestment will reduce the shares outstanding of J&J by approximately the value of the divested unit. The exchange offer follows an initial public offering of just over 10% of Kenvue in May. Within the exchange offering, J&J shareholders have the option to exchange all, some, or none of their shares for shares of Kenvue. With J&J offering an incentive of a 7% discount on Kenvue shares, we expect a high preference for Kenvue shares, especially as Kenvue is trading below our fair value estimate and J&J is trading just above our fair value estimate.

We expect the exchange offering will be the last step to completely divest Kenvue from J&J. The remaining J&J business will be a more focused company, leading in the developing and marketing of pharmaceuticals and medical devices. We continue to view the strong intangible assets in the pharma business and switching costs in the device segment (along with some intangible assets as well) as continuing to support a wide moat for J&J following the consumer unit divestment. Additionally, we believe a completely independent Kenvue will be able to more fully control capital allocation priorities, including paying recently initiated dividends and deleveraging its balance sheet, which should reinforce its wide moat.