View from City Road: Zeneca rights looks shaky

What a difference a year makes. When Imperial Chemical Industries announced its plans to split the group in two last July, it seemed logical that the cash to finance the deal should be raised through the pharmaceuticals arm to take advantage of the premium rating. A year on, it is the bulk chemical, paints and explosives business that has the glamourous rating while Zeneca is languishing at a 14 per cent discount to the market and its pounds 1.3bn rights issue looks daily more precarious.

Zeneca's shares yesterday touched a post-split low of 609p before closing at 612p, down 5.5p on the day. That means they have lost 10.3 per cent of their value since the official grey market began. New ICI, on the other hand, has gained 22.5 per cent and yesterday touched a post-split high of 709p before closing unchanged at 697p.

It is widely agreed that recovery potential and the dedication to restructuring and cost- cutting of Ronnie Hampel, the chief executive, make ICI the more attractive company. But its share price more than discounts this. The guaranteed 27.5p dividend gives it an above-average 4.9 per cent yield, but that will not be covered by earnings this year and UBS, one of the few independent brokers, expects only modest growth for the next five years.

By the same token, Zeneca is looking ridiculously cheap. A 30 per cent yield premium more than compensates for the likelihood of modest earnings and dividend growth, regardless of the outcome of the US health review. A 15 to 20 per cent premium would be compensation enough, suggesting a price between 665p and 690p.

The low price is partly because of the weight of stock overhanging the market. The underwriters do not want to risk buying in case the issue flops and they are obliged to pick up unwanted shares.

The financial muscle behind the rights issue means a spectacular flop is unlikely. When that becomes clear, Zeneca's shares should outperform. Until then, holders of new ICI should use their profits to invest in the nil paids, down 5p at 14.5p yesterday.