Kenvue IPO: Saved by the Greenshoe?
On May 4th 2023, consumer-healthcare business Kenvue (KVUE UN) went public as a result of Johnson & Johnson’s carve-out. Even though this is characterised as a spinoff due to the creation of a new subsidiary, it is treated by index providers as a traditional IPO since new shares are issued compared to an original spinoff where existing shares of the parent company are converted to the shares of the spun-off entity.
Initially, the IPO of 172.8 million shares out of the total shares outstanding – 1888.97 million – were priced at $22, resulting in a total company market capitalization of $41.6 billion and a float market capitalization of $3.8 billion due to an IPO free float of 9.15%.
As at trade close on Monday, May 8th 2023, the stock’s price has risen to $26.5 and the float has increased to 10.38% following the exercise of the greenshoe option of 25.9 million shares confirmed by the 8-K SEC filing. These have boosted the company’s market and float capitalizations to $50.7 billion and $5.3 billion respectively, with a final free float of 10.38%.
Despite the impressive company valuation, the low IPO float restricts the company’s access to indices or limits its passive fund flow demand. The increase of free float from below to above 10% may be deterministic as 10% is the index’s minimum float eligibility requirement for CRSP and S&P. But what about all the rest of the indices?
Generally there are two ways a company gets added to an index:
- Fast-entry: When a company is large enough to pass specific high thresholds in terms of market cap and float cap, then it will get added almost immediately to the index to enhance market replicability
- Quarterly review: For smaller companies, the addition can wait until the quarterly rebalance where other additions and deletions take place as well.
The below results are based on the latest data as of Monday close:
Market Cap: $50.7 billion.
Float Cap: $5.3 billion.
IPO free float: 9.15%
Greenshoe float: 10.38%
FTSE GEIS
- Fast-entry: Fails
The company passes the North America market cap level for fast-entry which is $23.9 billion but it fails the float cap threshold which is $7.97 billion.
- Quarterly review: Passes
Expected addition to the FTSE GEIS All-World at the December 2023 quarterly review as the float cap threshold is much lower. It will not get added in September because there is a minimum 3-month trading requirement.
RUSSELL US
- Fast-entry: N/A
There is no fast-entry for this index.
- Quarterly review: Passes
Expected addition at R1000 at the September 2023 quarterly review because the IPO window for addition in September is May 1st – July 31st.
CRSP
- Fast-entry: Passes (pending)
IPO fast entries are considered for inclusion after 5 trading days following the IPO with a minimum float requirement of 10%. Since the greenshoe was exercised on the third day, increasing the float above 10%, then there is a possibility for the company to be eligible for fast-entry into the CRSP Large Cap as it passes the minimum float requirement by the 5th day and the market cap threshold. If so, then fast-entry is expected to be announced by the index on Wednesday May 10th at the latest, and added at the close of the same day.
In the case that CRSP considers only the initial IPO float (which is below 10% excluding greenshoe), then it will not be eligible for fast-entry.
- Quarterly review: Fails
If it does not make a fast-entry then ORTEX expects the company to remain out of the index as the minimum float for quarterly review is 12.5% compared to a fast-entry which is 10%. The IPO float at lock-up expiry does not increase so given the current shareholder structure the float will remain at 10.38%.
S&P
S&P TMI
- Fast-entry: Fails
The IPO float cap is calculated as of the close of the 1st trading day and needs to be above $2 billion. Regarding index eligibility, the float needs to be a minimum of 10%. Based on this, we expect that it will fail fast-entry because the first trading day IPO float is below the minimum eligibility requirement of 10% even though the company’s market cap is above $2 billion. Methodology does not specify if they reconsider eligibility of the IPO following any exercise of the greeshoe. If it does, then this brings the float above 10% and fast-entry is expected to be announced close of Tuesday May 9th or Wednesday May 10th, and implemented 5 trading days later.
- Quarterly review: Passes
If it does not make a fast entry then it will be added at the June 2023 quarterly review because the greenshoe has been exercised in full before the June review cut-off date (12th May) to bring the float above 10%.
S&P 1500 composite
- Fast-entry: N/A
- Quarterly review: Passes
All IPO companies need a minimum 12-month trading requirement, thus it is expected to be added in the June 2024 quarterly review.
MSCI
- Fast-entry: Fails
The company passes the US market cap level for fast-entry which is ~$14.7 billion but fails the float cap threshold which is ~$7.3 billion.
- Quarterly review: Fails
The company’s float is below 15% and the thresholds for quarterly reviews will be as high as the fast-entry thresholds. Therefore, it will not be added at subsequent quarterly reviews assuming price and float remain near current levels.