Jeremy Warner's Outlook: Shell still wrestling with its moment of shame

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The Independent Online

Shell can only hope that yesterday's parallel statements from the Financial Services Authority and the US Securities and Exchange Commission on the reserving débâcle that threatened to engulf the company earlier this year finally closes the chapter on one of the darkest and most disreputable periods in its history.

Shell can only hope that yesterday's parallel statements from the Financial Services Authority and the US Securities and Exchange Commission on the reserving débâcle that threatened to engulf the company earlier this year finally closes the chapter on one of the darkest and most disreputable periods in its history.

The statements themselves make humiliating reading for a company that invests so heavily in public trust. Where once you could be sure of Shell, there seems very little you can be sure of now. Shell is bluntly accused of making false and misleading statements about its oil reserves over a five-year period, of doing so despite internal warnings that the statements were false, and then of blithely failing to correct the misleading impression given.

Despite the publication of a detailed account of what went wrong, it is still extraordinarily difficult to understand how a company as supposedly hedged around with corporate governance checks and balances as Shell could have practised market abuse on such a scale. As previously trailed, a $120m out-of-court settlement has been reached with the SEC. At the same time, the FSA has settled its market abuse enforcement action for £17m. Both authorities make the point that the fines would have been considerably higher but for the degree of co-operation the company has shown, yet the truth is that as far as the City and the public are concerned, there has been very little obvious contrition so far.

Three of the executives at the centre of the scandal have been forced to resign, but the rest of Shell's two boards remain untouched. There has been no public statement of apology, while the company's response to the failings which allowed the scandal to happen - an internal review of corporate governance procedures - has been woefully inadequate.

Few have confidence in the review producing anything of worth. The chairman, Jeroen van der Veer, insisted yesterday that the company had been working at "incredible high speed" over the summer to bring about changes that were fair to all investors. Whether the six months that have elapsed between now and the scandal first breaking can reasonably be described as incredible speed is open to question, but then all things are relative, and at the glacial pace that seems to characterise decision making within Shell, six months must seem like no time at all.

Mr van der Veer promises to give an update towards the end of September. I think we can already guess what it will say. The present dual-domiciled structure will remain in place with the assets 60 per cent attributable to the Dutch company and 40 per cent to the British. On the other hand, the company will move to a unified board with joint chairmen, in the manner of that other Anglo-Dutch goliath, Unilever. Whether that will be enough to satisfy investors, or indeed begin the long march back to peer group competitive rates of reserve replacement, remains to be seen.

The Shell supertanker seems to have such difficulty in changing course that by the time it eventually manages it, the oil may well have run dry altogether, and the world will instead rely on some other energy source.

¿ Glenmorangie

On the banks of the Dornoch Firth in north-eastern Scotland lies the tiny town of Tain, from whence comes a most glorious nectar, distilled and matured for centuries by just 16 keepers of its secret recipe according to ancient procedures and methods. For those that know their Scotch from their bourbon, this is the birthplace of Scotland's most famous Highland malt, Glenmorangie, and for a mere £300m it could be yours.

If this seems rather a lot to pay for a business with annual sales of less than £70m and earnings last year of only £6.5m, just think of the purest Scottish spring water, the mists that roll in from the northern seas, the leaping burn, the heather-filled hillside, the malting barley, fired from primeval peat, the mystique, the nose, the care that goes into each wondrous dram - aach, it's enough to make you fair lose your senses. Which is rather what NM Rothschild, the bank retained to sell the company, and the vendors, the controlling Macdonald family, hope might happen.

Glenmorangie's biggest selling point as a business asset is its scarcity value. It is only once in a blue moon that a drinks brand of such quality comes on the market, and if the Macdonald family has got bored with owning it, there are plenty of others who would dearly love to add it to their drinks cabinet. A lively auction is anticipated.

There is an element of trophy asset about a famous drinks brand. Bernard Arnault paid more than 100 times annual sales for the privilege of owning Chateau d Ychem, producer of one of the most highly sought-after Sauternes. Nobody believes that a Scotch whisky brand could change hands for such a staggering multiple. Whisky is, after all, only a superior form of rocket fuel, however much the Scots like to dress the spirit up with all kinds of extraordinary attributes.

Yet the experience of Macallan, which sold for 26 times earnings before interest and tax, shows that Scotch can still command some fancy valuations. Apply the multiple to Glenmorangie, and you get to a figure of more than £300m. Glenmorangie, moreover, is a considerably more desirable property than Macallan. While Scotch whisky as a whole may be in gentle decline, a victim of changing drink fashions and a more general, health-inspired aversion to spirits, single malts are still a growth sector. Luxury brands of this type can look forward to strongly growing demand as the developing regions of China and India lift themselves out of poverty.

What's more, there are big synergies to be had for rival trade buyers, not in the product itself, of course, which cannot be replicated or uprooted from its traditional home, but in bottling, warehousing and cooperage. The most likely buyers would be Glenmorangie's two existing international distributors, Bacardi and Brown-Forman Group, the maker of Jack Daniel's whiskey in the US. The latter company already has a 10 per cent share stake and boardroom representation.

The cost of buying out these distribution arrangements may act as a poison pill to other potential bidders, but even so a decent auction is expected. Nearly all other leading Scotch brands are already part of larger groupings. Glenmorangie is one of the last remaining independents. The Sixteen Men of Tain would be greatly disappointed if this didn't dictate a corresponding premium.

¿ Berkeley Group

There was much celebration among investors when Tony Pidgley, the managing director of Berkeley Group, announced a couple of months back that he planned to free up some £1.4bn of capital for return to shareholders by getting out of conventional housebuilding to concentrate instead on the supposed growth market of apartment building on brownfield inner city sites.

Yet there is always some wretched fly in the ointment, and in his case it has turned out to be the size of the related remuneration package. This would give him and other executives a flat rate of 15 per cent of the company's shares should he succeed in returning the full £1.4bn. Berkeley is an extraordinarily well run company, so there's not much doubt but that Mr Pidgley will succeed.

Nobody knows what the company will be worth by the time he's shrunk the company down to its new size. Berkeley's present market capitalisation is the same as the amount he's planning to return, so, as things stand, the market is factoring in hardly anything at all. Yet few believe Mr Pidgley won't succeed in creating any extra value at all over the six years he's giving himself to repay the capital.

Shareholders want the £1.4bn, but they are damned if they are going to vote through the incentive plan. Craftily, Mr Pidgley has made the two things interlinked in resolutions being put to shareholders and he's refusing to budge, even after a series of bridge-building meetings with institutional investors. All is set for an explosive showdown.

jeremy.warner@independent.co.uk

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