⚖️ Is J&J Smart To Spin-off Its Consumer Business?

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⚖️ Johnson & Johnson: Strategic Compulsion?

The world’s largest pharma and consumer goods company Johnson & Johnson (JNJ), announced it is carving out its consumer products business from its pharma and medical device operations. The de-merged entity will also be listed. Is this move strategic or out of compulsion?  (Tweet This)

Litigations, Litigations Everywhere…

It seems J&J is synonymous with litigation. The brand was known for its baby and child care products. But that very business brought the company immense bad press and an Everest-like pile of litigation. In 2019, the USFDA discovered traces of asbestos – a known carcinogen –  in Johnson’s baby powder.

The company is facing not one, not two, but 40K lawsuits regarding its baby powder. The plaintiffs include women who have ovarian cancer and others who are battling mesothelioma. The company continued to deny any wrongdoing as it tried ring-fencing itself from its talc liabilities.

Leveraging a Texas divisional merger law, J&J split its consumer business into two. It offloaded its talc liabilities into a newly created subsidiary LTL Management LLC. LTL moved its headquarters to North Carolina and promptly filed for bankruptcy protection, drawing severe criticism from all corners.

As a result of this legal maneuvering, consumers cannot recover damages against the company, even if it’s solvent, as the subsidiary filed for bankruptcy. Even as this was happening, the company continued singing its favorite tune – that its products were safe.

A jury in Missouri sided with the women who had initially sued the company and awarded a payout of $4.7B. However, the state appeals court reduced the award to $2B, which the Supreme Court upheld in June.

Not much of a coincidence then that LTL announced last month that J&J is capitalizing the company to the tune of $2B, along with other funds for future payouts linked to the asbestos-in-baby-powder claims. Still, the company insists these developments have nothing to do with its baby product issues.

In Whose Interest?

Last Friday, the 130-year old J&J announced it’s spinning off its problem child, the consumer division, to focus on the more-profitable pharmaceutical market. While the consumer products division has not inherited the name, it certainly has litigations circling overhead from day one.

The company’s household products unit includes Band-Aid bandages, Aveeno and Neutrogena skincare products, and Listerine. Although the consumer business contributes the least to its overall topline (17% in 2020), it has a tremendous brand recall.

The spin-off itself should be completed in the next 18 to 24 months. The name “Johnson and Johnson” will be retained for the pharmaceutical and medical devices division and will have incoming CEO Joaquin Duato at the helm.

J&J’s pharmaceutical and medical devices divisions are expected to generate $77B in revenue this year, while the consumer products business will chime in with revenue of ~$15B. The company claims this split will provide “more agility” to the de-merged division.

The financial terms for the deal are yet to be finalized, but the transaction will be tax-free, and the company expects to continue paying dividends, at least at current levels.

Shareholders had a subdued reaction to this news. If anything, the financial engineering and legal restructuring will help keep losses due to litigation to a minimum and stave off further erosion of value to the rest of the organization. In that sense, it’s a pretty smart move from the investors’ perspective.

But what about the plaintiffs who are crying foul and whose very lives are at stake due to the use of the asbestos-tainted baby powder? One can only hope capitalism will show up at their doorstep with a human touch.

Market Reaction
JNJ ended at $163.52, down 0.90%. Shares are up 4.5% this year.

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JNJ $163.52 -1.49 (0.90%)

Analyst Ratings (20 Analysts) BUY 55%  HOLD 45%  SELL 0%

Newsworthy 📰

On The Block: Exxon launches sale of shale gas properties in Texas (XOM +0.86%)

Change: Shell ditches the Dutch, seeks move to London in overhaul (RDS.A +2.51%)

Case: JPMorgan sues Tesla for $162M over warrants, Musk tweets (TSLA -1.94%)

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Today’s Market Terminology: Secondary Offering

A secondary offering occours when an investor sells their shares to the public on the secondary market after an IPO. They are also known as follow-on offerings, which are done to raise capital

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