The very modest uptick in the Mitchells & Butlers share price yesterday underlined what an awkward place the pub operator finds itself in. The £11 billion merger offer from Punch Taverns is opportunistic, coming hard on the heels of M&B's disastrous punt in the derivatives market. The credibility of the company is badly holed, while poor trading across the industry has made it an ideal time to pounce.

The M&B board won't want to be forced to take the Punch approach seriously, at least not at current levels. They will be hoping that at least one of the trio of private equity groups propping up the bar will do more than talk and come up with hard cash. Or that M&B's 23 per cent shareholder Robert Tchenguiz will pull a rabbit out of the hat.

But sentiment in the credit markets is hostile to a private equity-style deal. Bankers are in no mood to throw debt at leveraged pub deals of any kind. Buyout debt providers are doing in private what Egg is doing in public - telling borrowers to go away. And sentiment on pub property may start to sour too. The market hasn't been tested by a big pub property deal recently, but the downturn in residential and in office/retail is sure to have an impact on boozers.

A deal with Punch might not be such a fallback after all. Unlike a private equity deal, the short-term benefits to shareholders are straightforward - over £50million in cost savings from merging the head office. Giles Thorley, the Punch chief executive, has shown he can make a decent fist of pub mergers, while careful integration might even mean some of M&B's talent in squeezing out better margins rubs off on Punch. For long-term M&B investors, a merger offers the chance to share in the upside. This hardly looks a good time to be baling out for cash. And Punch should surely be able to add a few pennies more to its cash sweetener.

That won't suit either MrTchenguiz or the hedge funds, which alighted on M&B at just the wrong time and are now nursing nasty losses. Around 60 per cent of shareholders are thought to be in this unhappy position. But it may be the least-worst outcome.

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