Johnson & Johnson's Kenvue spinoff revives hope that the IPO market may be opening

Published Tue, Apr 25 20238:36 AM EDTUpdated Tue, Apr 25 20238:41 AM EDT

The news that Johnson & Johnson had finally begun a roadshow for its long-awaited Kenvue spinoff elicited some satisfaction among IPO watchers. The key message: this spinoff of J & J's consumer healthcare division is chock full of names familiar to investors and the public: Band-Aid, Aveeno, Johnson's baby shampoo, Tylenol, Listerine and Neutrogena. "The investor base is very familiar with the products," Matthew Kennedy, IPO market strategist at Renaissance Capital told me. "The earnings are easier to forecast, and investors might be familiar with the management teams. There are just fewer unknowns than investing in a relatively unknown venture-capital backed company." J & J said it would try to sell 151.2 million shares of Kenvue (scheduled to be traded at the NYSE under the symbol KVUE) at a price between $20-$23. If it floated at the midpoint ($21.50), it would sell $3.25 billion worth of shares. That would make it the biggest U.S. IPO since Rivian in November 2021, according to Kennedy. IPOs: when will the Great Drought end? As welcome as the Kenvue announcement is, it will not by itself turn around the disastrous IPO market, which has essentially been shuttered for more than 15 months. How bad is it? In the 10 years from 2013 to 2022, about $55 billion was raised on average each year in the IPO market. But in 2022, the IPO market cratered. Only $7.7 billion was raised. The total amount raised by IPOs so far in 2023 is $2.4 billion, according to Kennedy. Kenvue's $3.2 billion would double that. Bottom line: it's still a sad market. Another feature of IPOs: a small float Kennedy noted one feature of recent IPOs: a small float. Kenvue's float would total roughly 8% of its estimated market capitalization. Years ago, floats of 10%-20% were common, but companies have found that a lower float restricts the number of shares that trade, which can support the price. The result: a lower float has been a trend for years. Take Mobileye. It was the biggest tech IPO of 2022, raising $861 million, but the float was only about 5% of the market cap. Corebridge Financial, the biggest IPO last year, floated about 12% of the market capitalization. Spinoffs have become a big business It's not lost on IPO watchers that spinoffs have become a big business. In the last year, several big spinoffs have come from well-known companies like AIG, Intel and General Electric: Spinoffs: the big trade Kenvue J & J Corebridge Financial AIG Mobileye Intel GE Healthcare GE "These conglomerates are not working as well anymore," Santosh Rao, head of research at Manhattan Venture Research, told me. "At one point, it seems like you have a lot of synergies, but now the thinking is, 'why not just buy the individual company that is in the business you want?' Conglomerates are difficult to manage, and this is the age of the pure-play offering." Hope springs eternal in the IPO biz No one is expecting a big pop from Kenvue, and that for some is its appeal. "Investors are very valuation sensitive now, and Kenvue looks like a fairly straightforward company to pin a value on," Kennedy told me. "That means it probably won't see a huge pop (or drop) on day one. Investors want to see cash flow right now, and Kenvue has it. It has mature brands and predictable cash flows. Many of these brands consumers will continue to buy even in a recession. The growth prospects may not be anywhere near tech companies, but consumers are going to continue to buy Tylenol and Band-Aids, and they do have a dividend," he said, noting that Kenvue was planning on a dividend of 20 cents a quarter, which would amount to a 3.7% yield, at the offering midpoint. Another hope: prices would be lower for future IPOs, which would make buyers more interested. "Hopefully this will be a more rational IPO market," Rao told me, noting that IPOs have typically underperformed the market because of high initial prices. Many IPOs typically had strong first-day showings and then underperformed.