Pressure on Zeneca cash call

BIG institutional shareholders in ICI are increasingly upset about the pounds 1.3bn rights issue accompanying the proposed demerger of Zeneca. The pricing of the cash call will be announced on Wednesday.

Institutional discontent days before the sub-underwriting may force the Zeneca rights price down to a big discount on the 700p price at which the shares were recently trading on the grey market. The Stock Exchange, which blocked grey market deals two weeks ago, is allowing trading to restart when the rights details emerge.

'We will have difficulty supporting the sub-underwriting at much above 600p a share,' a large pension fund said this weekend. 'We also question why Zeneca needs the money, since it is supposed to be a growth company generating lots of cash. And the rights issue of millions of more shares is also going to slow down dividend growth over the next few years, which we don't much like either.'

Brokers close to the issue, however, claimed investors were enthusiastic. 'The feedback is going very well,' said one. 'The market is quite able to bear a pounds 1.3bn issue.'

Under the deal, ICI shareholders retain one 'old' ICI share and are given one new share in Zeneca. The rights issue is designed to raise pounds 1.3bn - cash that Zeneca will use to replace inter-company debt to ICI. Initially, there will be about 780 million Zeneca shares in issue, and a one-for-four rights issue at 600p would raise close on pounds 1.2bn, some way short of the target. ICI is currently trading at 1243p, down 16p on Friday.

Potential sub-underwriters are always tempted to talk down the price, but there is little doubt that some institutional shareholders feel ICI is in effect pushing through a rights issue via the back door. Investors vote on the ICI/Zeneca split later this month but, unusually, they will have no opportunity to vote separately on the rights issue.

'We think the demerger is a reasonable idea, but ICI should have completed the split first and then considered the need for a rights issue later as a separate matter,' said a large insurance company holding ICI shares.

The initial attraction of the demerger was that ICI would be able to raise new money cheaply because of the higher stock market rating given to pharmaceutical companies such as Zeneca.

But since then, fears over cuts in healthcare spending, notably in the US, have sent drug company ratings tumbling.