Recently, Kenvue (KVUE. US) announced on its official website that Johnson&Johnson (JNJ. US) will sell its remaining 9.5% stake in the company to Goldman Sachs and JPMorgan Chase in a debt to equity swap. This also means that Johnson&Johnson will completely divest Kenvue from the cosmetics industry, and Kenvue will become a completely independent consumer goods enterprise.
In fact, there is already a hint of complete divestment. In recent years, the parent company Johnson&Johnson has continuously reduced its holdings in Kenvue. Before going public, Johnson&Johnson held 100% equity in Kenvue, but after going public, it still holds 91.9%. But in August 2023, Johnson&Johnson significantly reduced its holdings and only retained 9.5% of Kenvue's shares until the remaining shares were cleared.
Keep in mind that Kenvue became one of the largest IPOs in the US stock market in 2023 with a massive IPO of nearly 300 billion yuan, thanks to 20 brands worth over 150 million US dollars. Its market value soared to over 50 billion US dollars. Why did Johnson&Johnson choose to clear its holdings?
Stripping has long been a clue
Perhaps there are early indications that the parent company Johnson&Johnson has chosen to completely divest. In recent years, Johnson&Johnson has been continuously reducing its holdings in Kenvue. Prior to going public, Johnson&Johnson held 100% equity in Kenvue, but still holds 91.9% after going public. But in August 2023, Johnson&Johnson significantly reduced its holdings and only retained 9.5% of Kenvue's shares. Until May 13th this year, Kenvue once again announced that Johnson&Johnson would sell the remaining shares.
Based on a price of $20 per share, the estimated value of this transaction is approximately $3.647 billion (approximately RMB 26.3 billion), and the transaction is scheduled to be completed on May 17th. After the completion of this transaction, it means that Johnson&Johnson will officially divest from the cosmetics industry.
Johnson&Johnson, founded in 1886, is one of the most comprehensive and widely distributed medical and health enterprises in the world, with businesses covering three major fields: medical equipment, pharmaceuticals, and consumer goods. Headquartered in New Brunswick, New Jersey, USA, with over 260 operating companies in 60 countries worldwide and over 130000 employees worldwide, the company achieved a global revenue of $82.6 billion in 2020 and a global R&D investment of $12.2 billion.
On November 12, 2021, Johnson&Johnson plans to split and restructure its existing three major businesses - pharmaceuticals and medical devices - and separate its consumer health business into two listed companies. The new consumer health company, which includes four major brands worth over $1 billion and 20 brands worth over $150 million, will have a total revenue of approximately $15 billion for the year 2021 and will be named Kenvue in September 2022. It will be listed on the New York Stock Exchange on May 4, 2023.
Zhan Junhao, founder of Fujian Huace Brand Positioning Consulting, stated in an interview with Huaxia Times that divesting Kenvue can enable Johnson&Johnson to focus more on its pharmaceutical and medical device businesses. This is Johnson&Johnson's core business and an important direction for its future development. Stripping Kenvue can help Johnson&Johnson optimize resource allocation and improve operational efficiency.
David Dubner, Global Head of Mergers and Acquisitions at Goldman Sachs, once said in a media interview, "The industry logic of a split is simple: when management believes that two companies will have higher value after being separated, they will split. It is important to consider re planning your strategy, your future operational plans, and your capital allocation priorities."
According to public information, Johnson&Johnson divested its consumer goods business precisely to focus on higher profit margin drug and medical device sales. But as of the time of publication, Johnson&Johnson has not responded to the interview letter from our reporter.
In addition, regarding the production and sales issues of Johnson&Johnson's related products after divesting its skincare and beauty business, the staff of the flagship store of Johnson&Johnson's related platform told a reporter from Huaxia Times that they have not received any notification yet and will provide feedback to their superiors.
Kenvue's growth is weak
For this spin off, Yuan Shuai, Executive Director of the High Quality Development Promotion Project for Specialized, Refined, and New Enterprises, analyzed to reporters from Huaxia Times that it may be related to Kenvue's weak performance growth.
He believes that with the intensification of market competition and changes in consumer demand, Kenvue may face greater challenges. However, divesting Kenvue may also bring some negative impacts. Firstly, Johnson&Johnson will lose an important source of income in the beauty industry. Secondly, divestment may lead to a decrease in brand value and market share. However, in the long run, if Johnson&Johnson can successfully transform and focus on its core business, then divesting Kenvue may be a wise decision.
From performance data, its revenue from 2021-2023 and the first quarter of 2024 were $15.054 billion, $14.95 billion, $15.444 billion, and $3.894 billion, respectively, ranking among the top ten global beauty groups with revenue growth rates of 4.06%, -0.69%, 3.3%, and 1.09%, respectively; The net profits for the same period were 2.078 billion US dollars, 2.064 billion US dollars, 1.664 billion US dollars, and 296 million US dollars, with net profit growth rates of 336.41%, -0.67%, -19.38%, and -36.89%, respectively.
Regarding the reason for Kenvue's slow growth, Yuan Shuai believes that from the market environment, the beauty industry is highly competitive, and major brands are seeking market share growth, which may lead to Kenvue facing pressure in the market. Meanwhile, changes in consumer demand and the rise of emerging markets may also have an impact on Kenvue's growth.
From the perspective of the brand itself, although Kenvue has multiple well-known brands, it may face the problem of unclear brand positioning. In addition, its investment in advertising and research and development may be insufficient to effectively promote brand development and product innovation. In addition, Kenvue may have issues with business diversification, as its growth rate in menstrual care, mouthwash, mass market skincare, body care, hair care, and other businesses is lower than that of consumer health products, which may also have a negative impact on its overall growth.
Despite weak growth, Kenvue's strength cannot be underestimated. With 20 brands worth over $150 million, Kenvue became one of the largest IPOs in the US stock market in 2023 with a massive IPO of nearly 300 billion yuan, and its market value soared to over $50 billion.
In order to boost performance, Kenvue has also made efforts, such as layoffs. Over the past year, Kenvue has been constantly undergoing changes, controlling costs through layoffs and reducing the size of its brand business. On May 7th US time, Kenvue released its Q1 2024 financial report and stated that the company's board of directors approved a measure on May 6th, with an expected global layoff of 4%, aimed at improving organizational efficiency and positioning Kenvue for future growth.
According to Kenvue's official disclosure data, the company has a total of 22000 employees, of which 1800 are in China. Therefore, it is roughly estimated that this layoff is expected to affect 880 employees worldwide.
In addition, we will increase investment in the Chinese market, investing 110 million yuan, upgrading production facilities, and strengthening production capacity in the Chinese market.
Once deeply embroiled in a cancer controversy
In addition, it is rumored that the decline in Kenvue's performance may be partly due to reputation issues caused by the carcinogenic incident of its Johnson&Johnson baby powder.
In August 2022, Johnson&Johnson even announced that it would stop selling baby body powder made from talcum powder globally in 2023 and replace talcum powder with products based on corn starch. However, Johnson&Johnson has always insisted on ensuring product quality is safe.
According to incomplete statistics, as of October 14, 2022, Johnson&Johnson has faced 37515 lawsuits regarding talc powder containing asbestos in its body powder products. In these lawsuits, consumers believe that long-term use of Johnson&Johnson's body powder can cause cancer.
It is worth mentioning that on May 1st, Johnson&Johnson announced a restructuring plan proposed by its subsidiary LLT Management LLC (LLT) to comprehensively and ultimately resolve all current and future claims related to ovarian cancer in talc powder lawsuits against the company and its affiliates in the United States. The plan promises to pay approximately $6.475 billion in present value compensation to claimants within 25 years.
In Yuan Shuai's view, the "carcinogenic" controversy may have a negative impact on the company's reputation and brand image, thereby affecting its product sales and market share. However, the direct correlation with this divestment may not be obvious. However, this incident may increase the urgency of Johnson&Johnson's divestment of Kenvue, as the divestment can help reduce potential risks associated with Kenvue and improve its overall financial condition.
Zhan Junhao further pointed out that there is definitely a correlation between the Johnson&Johnson cancer scandal and this divestment, as well as its impact on the company. The Johnson&Johnson cancer scandal has had a negative impact on Johnson&Johnson's brand image and reputation, which may lead to a decrease in consumer trust in Johnson&Johnson's products. This decrease in trust may affect Kenvue's market performance, exacerbating its lackluster performance growth. Therefore, Johnson&Johnson may consider divesting Kenvue as a measure to reduce risk, protect brand image and reputation.
For the company, Yuan Shuai believes that both the cancer scandal and the divestment of Kenvue may bring some challenges and uncertainties. By actively addressing these challenges, Johnson&Johnson can strive to restore its reputation and brand image, and seek new growth opportunities. Meanwhile, divesting Kenvue may also bring some financial benefits to Johnson&Johnson, such as reducing financial pressure and improving capital efficiency.
Is this ultimate spin off a win-win situation for Johnson&Johnson and Kenvue, or is it a last resort? Our reporter will continue to monitor.