Why is Johnson & Johnson Buying $12.9 Billion of This Stock?

Johnson & Johnson’s (NYSE:JNJ) acquisition of Synthes would be routed through Irish subsidiary Janssen Pharmaceutical, which will provide the merger consideration through shares in J&J worth $12.9 billion and cash on its books. No external debt is proposed to be raised by Janssen.

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For providing the J&J shares component of the consideration, Janssen has entered into Accelerated Share Repurchase ASR agreements with Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM) for the purchase of about 203.7 million J&J shares.

The ASRs would work as follows: These banks will borrow the shares from market stock lenders to deliver to Janssen and thereafter repurchase the shares from the open market to return to the stock lenders. The ASR agreements are subject to terms customary for similar agreements, including adjustments upon the occurrence of certain events under which the ASR agreements may be extended or canceled.

The impact of the acquisition on J&J earnings, as per the original S-4 filing, then based on 2010 figures, was a dilutive 22 cents a share. According to latest estimates, the acquisition would be accretive to 2012 earnings by about 3 cents to 5 cents a share. These estimates assume closure of the transaction by mid-2012, and the most recent assessment of the sales outlook on the merged orthopedics businesses.

In the second half, charges could include $1.1 billion related to the acquisition such as restructuring and integration costs, inventory adjustments and currency translations.

For 2013, J&J expects the combined businesses to report an accretion to adjusted earnings of 10 cents to 15 cents.

More information on the acquisition, and its impact on earnings for 2012, will be available July 17 via the quarterly earnings conference call with analysts.

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