Jeremy Warner's Outlook: Tchenguiz bid for Mitchells & Butlers may fall victim to backlash against private equity

UK interest rates: heading higher; Shell: reserving issue still not resolved
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The Independent Online

Robert Tchenguiz is plainly a determined chap. His bid for the pubs group Mitchells & Butlers looked to be dead in the water when Goldman Sachs unexpectedly withdrew from his private equity consortium, unconvincingly protesting that it no longer had the stomach for hostile takeover approaches.

In fact, what had happened was that Roger Carr, M&B's chairman, had told the American investment bankers that he didn't take kindly to their unwanted approach given that with another hat on, he was paying them a hefty advisory fee. The conflict of interest was in his view intolerable.

Undeterred, Mr Tchenguiz has returned with new advisers, lenders and equity partners. Yet despite his best endeavours, he'll still need a miracle to succeed. The renewed 550p-a-share bid was treated with exactly the same contempt as the last approach. Like all private equity bidders, Mr Tchenguiz needs a recommendation and a due diligence to proceed. He won't get it at anything less than £6 a share. What's more, Mr Carr seems to have the support of his largest shareholders in taking such a stance.

Are they right to be so obstinate? The lessons of Marks & Spencer and Debenhams suggest they are. With M&S, they have been handsomely rewarded for resisting Philip Green's bear hug. With Debenhams, they sold, and in the process gave away massive value to the company's private equity buyers. Determined not to make that mistake again, they've supported companies in an increasingly hostile approach to private equity takeover bids.

This is an encouraging development. It's still too early to say the tide has definitively turned back in favour of the quoted, joint stock company, after a period when private equity and its partners in crime, the hedge funds, seemed to call all the shots. Yet the easy pickings may already have gone, and more often than not private equity now finds itself rowing against the current in these public to private transactions.

UK interest rates: heading higher

Here's a parable on the UK economy. A man living in a smallish farm with his nagging wife and screaming children grows tired of his life, which seems depressing and unsatisfactory. If something doesn't change for the better soon, I'll go mad, he tells himself, so he decides to consult the local priest. A variation of this story is told in so many different cultures and societies that for priest you can read rabbi, imam, or even vicar, whatever takes your fancy. For the purposes of political correctness, we'll use "religious leader".

The religious leader tells the incredulous man that one way of easing his pain might be to bring all his hens into the house with him for company. This seems odd advice, but the man is desperate and willing to try anything. A week later, he returns to the religious leader. Things have got much worse, he says. Not only do I have the nagging wife and the screaming children, but I also have screeching hens. Try moving the cow into the house as well, the religious leader says. Predictably things degenerate further. There's the nagging wife, the screaming children, the screeching hens and now there's the mooing cow.

To cut a long story short, the process goes on until the man has the whole farmyard living in the house with him, together with his uncle and aunts and his mother in law. That's it. I'm killing myself if this goes on, he tells his religious leader. Your advice is totally useless.

Well, how about sending the chickens, the cow, the goat, the uncles, the aunts and the mother in law packing, says the religious leader, and see what happens then. A week later, the man returns with a big smile on his face. I'm eternally grateful, he says. I chucked them all out and I feel great. My life is so much better than it was. Even though you've still got the nagging wife and the screaming children, the religious leader suggests. Yes, and thank god for bestowing me with such blessings.

One of the oddities about growing levels of prosperity is that they have a tendency to trigger ever greater levels of dissatisfaction. This is not just because of the old truism that the more you have, the more you want. It is also because people begin to believe that, notwithstanding the evidence, they are actually getting worse off. The longer the economic expansion continues, the more likely they are to fulminate against it and complain loudly that the economy is going to hell in a handcart. Even when it has been demonstrated beyond all reasonable doubt that in fact it is not, they continue to protest that it is about to, such has been the scale of the economic mismanagement.

With good reason, business and the City grow ever more alarmed about the burden of tax and regulation. Even Gordon Brown recognises that the economy has in all probability reached the limits of its capacity to be taxed. Any more would risk hitting the law of diminishing returns. Yet not only is the economy still growing, after more than a year of sluggish growth, it now seems to be picking up again quite sharply.

Interest rates were again left on hold by the Bank of England's Monetary Policy Committee yesterday, but the markets are already betting on a rise by the end of the year. Both the Treasury and the Bank of England were being accused of unrealistic optimism in their forecasts of revived growth as recently as only a few months back. Now they are starting to look remarkably prescient. Even the housing market is picking up again.

The condition of the UK economy is not nearly as bad as it is widely painted. Certain industries are facing profound structural change, which greatly adds to the prevailing sentiment of uncertainty and, yes, business is being taxed more heavily than is healthy.

But as in the parable, just think how much worse it might be. The economy hasn't yet left the tracks, despite the Government's very best endeavours to derail it, and barring some September 11-type catastrophe, it doesn't look likely to either.

Shell: reserving issue still not resolved

Come back Phil Watts, all is forgiven. Well, perhaps not quite, but his successor at Royal Dutch Shell, Jeroen van der Veer, raises an interesting point in admitting that the company may not meet its target of a 100 per cent reserve replacement ratio as defined by American Securities and Exchange Commission rules.

Phil Watts lost his job after it emerged that the company had hugely inflated its proven reserves in an attempt to persuade investors that its position was better than it really was. He'd counted in as proven reserves that plainly weren't and he had also tried to cover it all up when the truth threatened to emerge. Nothing forgives such deceit.

Yet it may always have been the case that the SEC rules were largely meaningless in the first place. The definition of proven reserves is only a point on a curve that stretches from discovery through to production. Many analysts have come to regard it as not terribly helpful - a bit like the accounting definition of a pension fund deficit, which as a point in time encapsulation of the gap between assets and liabilities is for most companies not particularly instructive.

Mr Van der Veer sees great potential in unconventional hydrocarbons, such as oil sands and gas-to-liquids. For Shell, these are an ever-growing point of focus and investment, eventually destined to help the company drive full replacement of its production. Fast approaching "peak oil", where world production from known reserves peaks out and then begins to decline, gives added importance to these alternative sources of supply. Yet they do not qualify as SEC proved oil and gas reserves.

As a result, Mr Van der Veer candidly admits, he may struggle to get to that promised 100 per cent replacement ratio. By doing certain things, he could get there, and without resorting to the creative devices used by his predecessor, but he doesn't want the timing, place and size of investment spending to be dictated by such an artificial target.

What a pity Phil Watts didn't apply the same degree of common sense. He might be still in the job today had he done so.

j.warner@independent.co.uk

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