Investing in businesses that are simple, predictable, profitable, and replicable at attractive prices is our primary strategy. However, occasionally we enjoy delving into more unique investment opportunities. Recently, Johnson & Johnson's offer to exchange its shares for Kenvue shares caught our eye.
I think the risk of KVUE selling off post exchange is significant and should not be dismissed. Firstly, free float of KVUE is currently 10% with further 80% shares being listed post exchange leading to large potential overhang.
Secondly, was a similar situation last year when MMM spun out NEOG in a similar exchange offer with 7.5% discount. 1 day before exchange (Aug 30th) deadline NEOG traded at $21.17, just 7 days later (by the time most people received shares in their brokerage account) NEOG was trading at $16.95 (6th Sep) a 20% drop elimating the discount you received and resulting in an overall loss. You could mitigate against this by hedging KVUE, however borrow cost is very high (40% currently due to small free float) and will likely continue to rise into tender deadline.
So the odd lot JnJ tender trade was a loss. 99 shares purchased with a broker with shares registered in the Street name means they were tendered at the the prorated 23%.
One could write some KVUE calls to enhance the return / somewhat mitigate the downside risk.
I think the risk of KVUE selling off post exchange is significant and should not be dismissed. Firstly, free float of KVUE is currently 10% with further 80% shares being listed post exchange leading to large potential overhang.
Secondly, was a similar situation last year when MMM spun out NEOG in a similar exchange offer with 7.5% discount. 1 day before exchange (Aug 30th) deadline NEOG traded at $21.17, just 7 days later (by the time most people received shares in their brokerage account) NEOG was trading at $16.95 (6th Sep) a 20% drop elimating the discount you received and resulting in an overall loss. You could mitigate against this by hedging KVUE, however borrow cost is very high (40% currently due to small free float) and will likely continue to rise into tender deadline.
So the odd lot JnJ tender trade was a loss. 99 shares purchased with a broker with shares registered in the Street name means they were tendered at the the prorated 23%.