City: Rights test

THE NEWS just doesn't get better for Zeneca as its share price continues to swoop dangerously low over the rights issue price. With a week to go until the pounds 1.3bn offer closes, time is running out for investors, underwriters and brokers alike.

It is not hard to explain why the shares have been sinking steadily over the past few weeks. At a price of around 616p (although it dipped below 610p during the week), Zeneca is on a rating roughly equal to that of other pharmaceutical companies. Yet compared with Glaxo or SmithKline Beecham, there is nothing special about it. Institutions don't see much reason to unload other pharmaceuticals to make room for Zeneca in their funds. And the mood is jittery in the US market as it waits to see what the Clinton health reforms will mean for the drugs sector.

The big institutions are generally supportive of the issue - but then, most of them would be because of their underwriting involvement. The Prudential probably reflected the mood on Friday when it announced what appeared to be a neatly hedged bet: on the one hand it had dumped some of its Zeneca shares in the market, while on the other hand it said it would be taking up most of its rights. The one thing institutions do not want is to take up their rights only to find they have also been left with a big 'stick' (whatever they are left with as underwriters). Given the uncertainties in the pharmaceuticals market, they are more likely to opt for caution and not take up their rights.

From their point of view, it might not be so bad if the issue turns into a bit of a flop. They are getting worried about the feeding frenzy of companies coming greedily to the market for cash they do not really need. If Zeneca experienced a little accident on its way to the market, it would at least issue a salutary warning to other companies not to push their luck.

There must, however, be sweaty palms at SG Warburg. If it fails to get the Zeneca issue away, the Government may start to worry about its performance in the BT3 share sale in July. It can't pull Warburg out of the sale, but it could scale back its share of the action. And that would be the kind of embarrassment that Sir David Scholey and his cohorts could well do without.

Jeremy Warner is on holiday.