Johnson & Johnson’s
$35 billion exchange offer for
Kenvue
was tax-free for J&J shareholders who participated in the swap, but figuring out the so-called cost basis for investors can be tricky.
Johnson & Johnson (ticker: JNJ) said Monday that its exchange offer for Kenvue (KVUE) was significantly oversubscribed by a factor of more than four to one. That means that J&J holders who elected to participate in the exchange offer, or split-off, will see only 23.8% of their J&J shares converted into Kenvue stock—23.8% is the preliminary estimate of the proration.
A holder of 1,000 J&J shares would see 238 swapped for roughly 1,911 Kenvue shares (based on an exchange ratio of about 8.03 Kenvue shares for each J&J share) and retain 762 J&J shares, Barron’s estimates. Investors who own less than 100 shares of J&J got special treatment: odd-lot holders who submitted all their shares in the exchange offer were not subject to proration.
Johnson & Johnson stock was down 0.2% on Tuesday at $167.35, while Kenvue is up 3.3% to $23.67. Kenvue was being helped by news late Monday that the consumer health company, which owns such brands as Listerine and Tylenol, will be added to the S&P 500 index before the start of trading Friday.
New York tax expert Robert Willens says that a J&J investor’s cost basis carries over to Kenvue. If an investor paid $150 a share for J&J stock, the cost basis for Kenvue would be around $18.68 ($150 divided by the exchange ratio of 8.03).
It gets more complicated if an investor has made multiple purchases of J&J at different prices. In that case, the investor can elect which J&J shares were converted to Kenvue. When selling Kenvue stock, shareholders have an incentive to use higher-cost J&J stock as the basis to minimize taxes.
“An investor can designate which shares of JNJ stock that he or she owns were surrendered in exchange for the KVUE stock received in the split-off. Such a designation will be “respected” by the I.R.S. so long as it’s done prior to the time the basis becomes relevant, i.e., prior to the time the shares are sold or otherwise disposed of,” Willens wrote in an email to Barron’s.
“If an investor holds several blocks of JNJ stock, he or she should designate the block with the highest basis as exchanged for the KVUE stock. This strategy would minimize the taxable gain reported on the sale of such KVUE stock,” he added.
J&J will exchange 1.53 billion shares of Kenvue in the offer for J&J stock and retain a 9.5% stake in Kenvue, or about 180 million shares, Barron’s estimates. The exchange offer amounts to a big buyback paid for with Kenvue stock. J&J took Kenvue public in May.
Write to Andrew Bary at [email protected]
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