ALEX BRUMMER COMMENT: Old Lady casts her shadow

By ALEX BRUMMER, CITY EDITOR
Updated:

Alistair Darling didn't have to wait long to fire back his defensive barrage at Mervyn King. It was a case of Edinburgh man fighting back against Edinburgh speech.

King's proposition that splitting the utility from the casino functions of banks might offer better safeguards for the taxpayer was seen by the Chancellor as a throwback to the Glass-Steagall approach and the 1930s.

Nevertheless, King's comments will have sent a shiver, not just through the headquarters of Royal Bank of Scotland, which has is seeking to burnish its investment banking skills, but Barclays and HSBC.

darling

On the defensive: Darling quickly came back against propositions in Mervyn King's speech in Edinburgh


The politics of banking at present are peculiarly complex. Throughout the debate the Tories have tended to line up behind the Bank of England, largely because it is a way of attacking Labour without appearing to be irresponsible.

Labour have used much the same tactic recently. Its spokesmen have quoted former Monetary Policy Committee member David Blanchflower's cataclysmic views on the employment consequences of Tory spending cuts as if they were the Holy Grail.

Quoting central bankers in your favour gives politicians credibility.

The reality is that the bankers have placed the British government and those around the world in an invidious position.

By ramping up the bonus culture and shadow banking profits - at a time when the UK taxpayer is still supplying some £1 trillion of assistance to the banking system - they have robbed Labour of any cover.

So the Chancellor had no choice but to disassociate himself from Goldman Sachs arguing that what happened there 'sends the wrong signals'.

Standing in the middle is the Financial Services Authority. It is seeking to be as tough as possible but also will be anxious not to shoot down the Tory government in waiting in flames.

The only thing that everyone seems to agree on is that the return of rapacious behaviour by bankers doesn't help anyone.

That is why taxing away supernormal profits and bonuses is such an attractive option.

Blowing bubbles

Miraculously, as Kraft scrambles to assemble the financing for its bid, Cadbury produced the robust third quarter growth necessary to make a fight for its independence.

The chocolatier has even puffed some extra air into its best-selling Wispa bars helping to blow up margins to the mid-teens.

If it intends to use this tactic together with shrinking the size of Dairy Milk bars to see off the advances of Irene Rosenfeld it may end of pleasing investors at the expense of the chocoholics. Still no one can accuse the normally taciturn Cadbury chief executive, Todd Stitzer, of holding back.

The response to the Kraft assault hits all the investor buttons. The overall sales target has been restored to the 4 per cent to 6 per cent range, after a stutter earlier in the year.

In the early part of the year Cadbury suffered from a deterioration of gum sales in the US as unemployment soared and impulse purchases took a hit.

That, now, seems to have been cured with gum growth doubling between the second and third quarter.

If Cadbury has a regret it must be that it is having to go into arm to arm combat with Rosenfeld without a white knight in reserve.

The most obvious one, Hershey, Cadbury's production partner in the US, looks constrained by the complexities of its ownership.

So providing Kraft can find the finance, something which looks well advanced, it appears as if it will be a straight fight.

For the moment, the share register looks to be in Cadbury's favour with the long term investors remaining firm.

This makes it very different to the takeover fights of the boom years when the register of targets would quickly become dominated by hedge funds, arbitragers and other assorted cowboys out for a quick turn.

Kraft rejects the idea that its offer, inadequate at 731p a share, is somehow highly leveraged, noting that even if it takes on new debt it will only represent 25 per cent of equity.

Maybe, but as the price goes up - 850p looks like the minimum exit price - so will the borrowing.

In an age of deleveraging this may not be that attractive a prospect however kind Kraft promises to be to our great, ever lighter British brands.

Spanish retreat

Kraft at least is not involved in a top of the market takeover of the kind undertaken by Spanish group Ferrovial when it bought BAA.

Now Ferrovial is really suffering the consequences with the near forced sale of Gatwick for £1.5billion to Global Infrastructure Partners, owners of London's City Airport.

It is a deal being done at a sharp discount to the implied value of Ferrovial's original deal and with far less debt.

Times they are a changing.

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