M&A boom revives City spirits

With Kraft's £10bn offer for Cadbury's, and T-Mobile's merger with Orange, M&A activity is back.

Chief executives "have rediscovered their animal spirits", said Stephen Foley in The Independent. This Monday, US food giant Kraft made a $16.7bn (£10bn) cash-and-share offer for Cadbury, which the British confectioner rejected as too low. Deutsche Telekom's UK subsidiary T-Mobile is also merging with France Telecom-owned Orange in a 50:50 joint venture.

Meanwhile UK-listed miner Xstrata was rumoured to be about to bid $5bn for rival Lonmin and China's Unicom and Spain's Telefonica are buying stakes in each other. In all, Monday alone saw $37bn of actual, proposed and rumoured deals, noted Edward Hadas on Breakingviews.com.

What the commentators said

Following the credit crunch, which saw UK M&A activity hit a 40-year low, mergers and acquisitions are back, with "logical, strategic deals at the right price" the dominant theme, as Andrew Bell of HSBC pointed out. The worst appears to be over for the economy and recovering equity and credit markets have also buoyed confidence. Companies can still "pick up assets and brands for a fraction of the price they would have paid at the peak of the boom", said KPMG's John Kelly. And firms that have spent the last two years squeezing out costs are now seeking growth the fastest way to boost profits is to snap up a rival, added Lina Saigol in the FT. The M&A market has a long way to go, however. Unless there are $270bn of deals in September, this will still be the weakest quarter since the autumn of 2004.

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Cadbury: offer not sweet enough

Meanwhile, Cadbury is "a tasty asset" for Kraft, said Matthew Curtin in The Wall Street Journal. The combined group would leapfrog Mars to claim the top spot in the confectionery market. Thanks to its colonial heritage, Cadbury has an emerging-market presence that Kraft lacks, while the combined entity would also gain from selling Cadbury products in the US.

But Kraft needs Cadbury more than vice versa, said David Wighton in The Times. Revenue is growing solidly, while Kraft's recent growth has been "lacklustre"; Cadbury would provide "a sugar rush". And Kraft's offer is hardly generous. But it's not clear how much more Kraft can afford to offer given its debt pile, said The Economist. Moreover, confectionery giants Hershey and Nestl could launch a joint bid that would split Cadbury between the two. Whatever happens, it's likely that Cadbury's 185 years of independence will soon be over.

Mobile deal ends price war

The Orange/T-Mobile joint venture has "something for everybody", said Una Galani on Breakingviews.com. It will combine the third- and fourth-largest UK mobile groups to create a clear leader in the market with 37% of revenues. Deutsche Telecom gets to dump a "subscale business" and rivals can look forward to "the end of a long-running destructive price war": mobile groups' margins have fallen by 10% over the past five years. So while UK regulator Ofcom says it intends to look closely at the merger, rivals "aren't likely to complain".

But the regulators should "wring a few concessions for consumers" as the market will be less competitive, said Nils Pratley in The Guardian. That shouldn't prove too difficult a task: "T-Mobile and Orange are desperate to proceed."

CBRY: 77p; 12m change 22%

KFT: $26.70; 12m change -20%