(This was not an investment made by the Hurdle Rate Unit Trust, please refer to the August 2023 Letter for more information)
This investment was made aware to me by this Substack post by Eagle Point Capital, which provided a great overview of the thesis in and of itself so I suggest giving that a read.
On July 24 2024 Johnson & Johnson (J&J) launched an exchange offer for its Kenvue (NYSE:KVUE) holding, of which it had held 100% of the company up until it’s decision to spin it off in an IPO in May 2023 where it sold 10% of it’s shareholding. This exchange offer represents an additional 80% of the Kenvue business being sold in consideration for a large scale repurchase of its own common stock.
The specifics of a deal were an initial implied value of $107.53 per $100 worth of J&J shares held by the shareholder with once again, an ‘odd lot’ priority provision which allowed us to purchase 99 shares without the highly likely chance of proration occurring. However, this was subject to a maximum ‘exchange ratio’ of 8.0549 shares of Kenvue per J&J share, making it riskier the earlier you bought before the finalisation of the exchange ratio. Thankfully, the final exchange ratio was 8.0215, below the upper limit, affording us the best possible outcome. The process is shown below.
So, the primary risks to the investment were related to the price movement of both J&J and Kenvue along with the movement of the AUDUSD. However, there was a further factor which was working in our favour, the imminent inclusion of Kenvue in the S&P500 on the closure of the exchange offer. According to Barron’s, approximately 300 million Kenvue shares (~15% of the float) could be purchased by S&P 500 index funds required to hold all the index’s constituents in short order. This and some ~93m shares in Kenvue short interest to take advantage of the arbitrage opportunity that was the exchange offer gave me strong confidence that it was unlikely Kenvue shares would fall further after being allotted. Low and behold on the finalisation of the exchange offer on the 24 August 2023, Kenvue shares had 370 million trading volume and saw it’s share price close slightly higher in the day, allowing me to sell at a favourable share price.
So, in summary, I ended up purchasing my J&J shares at $173.22 per share and selling my Kenvue shares at $23.20 per share, plus being eligible for the payment of a $0.20 Kenvue dividend, a profit of +8.51% in a 12-day holding period, made sweeter by favourable AUDUSD exchange rate movement which resulted in a base currency return of +9.74% / AUD $2,570.49 per odd-lot, an annualised return of 1,599% p.a.