View from City Road: SmithKline gap still gapes

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SMITHKLINE Beecham's attempts to narrow the discrepancy between the price of its British and American shares is meeting with little success. Last month, it split the US equity units into five to make them directly comparable with the UK 'A' shares. But yesterday the equity units closed up 1p at 410p, a 10.2 per cent discount to the 'A' shares, also up 1p at 457p.

That is roughly in line with trading this year, so there is little evidence that the split has achieved its objective. SmithKline puts this down to low trading levels in the summer, but the problem appears to be more deeply rooted than that. For British investors the equity units are slightly less attractive as dividends are paid in dollars and suffer a 15 per cent withholding tax. But that does not explain the size of the discrepancy.

As fast as they buy the units, US investors sell them. Paul Woodhouse of Smith New Court estimates Americans have been cutting their holdings by about 1 per cent a month. This has left British shareholders with about 65 per cent of the company, compared with 50 per cent when the merger took place three years ago, and about 30 per cent of the equity units.

This is partly because US profits are calculated differently - companies have to depreciate goodwill against profits, for example, while they can write it off against reserves under UK rules. SmithKline Beckman was less highly regarded in the US than Beecham was here. But US investors are also - unjustifiably - less convinced about the merged company's prospects than British ones are.

That means SmithKline has its work cut out to narrow the gap. In the meantime buy the units.

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