Outlook: Shell's whodunnit script is worthy of fiction

Say no to Permira
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"I am becoming sick and tired about lying" ... "we are heading towards a watershed reputational disaster" ... "the market can only be fooled if the credibility of the company is high. Unfortunately, we are struggling on all key criteria". It is hard to imagine a greater sense of impending disaster than that communicated in a series of increasingly panic stricken e-mails and memos by Walter van de Vijver, Shell's former head of exploration and production, to his chairman, Sir Philip Watts, and the rest of the Shell management committee as the enormity of the crisis facing one of the world's most admired companies began to sink home.

Nor is it easy to imagine a more damning indictment or demonisation of the former chairman than the one contained in yesterday's internal report into the affair. At one point, Mr van de Vijver is instructed by Sir Philip, with evident menace "to leave no stone unturned" and "include consideration of all ways and means to achieve a 100 per cent reserve renewal ratio", even though Mr van de Vijver was already complaining bitterly about the appaling legacy of overbooked reserves he had been left by Sir Philip, his predecessor as head of exploration and development.

What makes this stranger than fiction report more remarkable still is that what we've had only the sanitised version so far. Large parts of it have been exorcised on the instructions of regulators, so there is presumably worse to come. You simply couldn't have made it up. Some quick minded soul will already be devising a movie script around it. The single, part time former Shell employee who Sir Philip put in charge of auditing Shell's internal reserves estimates, expresses the view that he should have been more forceful in insisting that the company comply with Securities & Exchange Commission rules, but this would probably have cost him his job.

What emerges is cover-up, delusion and management intrigue on a grand scale. Sir Philip is considered to have secured the job of chairman because there was a perception within the group and in the stock market that he had been highly successful while head of exploration and production, in part because of his ability to meet and exceed reserve expectations. As we now know, that perception was built on sand.

Mr van de Vijver is meanwhile depicted as a sulky, brooding presence, unable for reasons of internal politics and because he himself hoped one day to become chairman, fully to stick the knife into his all powerful boss. When he complains that the history of over booked reserves made it impossible to perform the "miracles" expected of him, this is seen by the management committee as more of a case of sniping at his chairman, sour grapes and management failure, than the gigantic regulatory nightmare it was about to become.

Mr van de Vijver began warning of the problem of overbooked reserves the moment he got into the job, but at all points he seems a half hearted whistle blower, who for some reason is unable wholly to shop his autocratic boss. Bizarrely, Mr van de Vijver was for public consumption still going along with Sir Philip's version of events as late as February's press conference, when the discovery of the overreserving was attributed to "catalytic" reviews in 2003. As we now know, the problem had been known about for at least two years previously.

In one of his memos, Mr van de Vijver describes the company as "caught in a box", by which he meant that external perceptions of the company were so far adrift of the reality that it made it hard to admit the truth. The management committee, on the other hand, knew the truth as early as July 2002, when minutes record a recognition of the fact that the debooking of reserves could not be delayed indefinitely.

The internal report expresses the view that the "caught in a box" dilemma had been transmitted to the management committee in "a careful fashion so as not to compromise/undermine the previous leadership". The severity or magnitude of the reserving issues may therefore not have been fully appreciated. This is a nice way of excusing other executives, and explaining their failure to act but, even assuming its veracity, it looks indicative of management almost wholly asleep at the wheel.

Why didn't Mr van de Vijver, or anyone else for that matter, alert the non executives when the problems first became apparent? There are more loose ends here than a bowl of spaghetti. The movie surely won't allow such self-evident riddles in the plot to go unexplained.

Shell is already being described as Britain's Enron, which isn't quite correct, because damaged and crisis-torn though the company might be, bust it ain't. Nor is it even in danger of losing investment grade. None the less, the repercussions will echo for years to come.

To judge by yesterday's report, both Sir Philip and the company face years of debilitating civil and possibly even criminal prosecutions. At every level, the company's management controls have been found lacking. Just as worrying, Shell hasn't been replacing its reserves as quickly as it's been depleting them, which is rather what the trouble shooting business of big oil is meant to be all about. The watershed reputational damage that Mr van de Vijver warned of has come to pass. Nobody can any longer be sure of Shell.

Say no to Permira

If Permira thinks WH Smith is worth 375p a share, then it's almost certainly worth considerably more. The City's dozy old institutional investors have been made to look prize Charlies once too often by selling off Britain's prime retail properties to private equity, only to gaze on enviously at the fabulous returns their new owners make from them. They must not make the same mistake again.

Keith Hammill and Simon Burke, both former WH Smith employees, hope to make hundreds of millions of pounds for their private equity backers from the tired old high street stalwart, simply by injecting debt and some commonsense retail principles. Cannot Kate Swann, WH Smith's newish chief executive, achieve the same thing for her long-suffering legacy investors? A former Tesco management trainee and Argos MD, she's a bit of an unknown quantity in running her own show. None the less, I see no reason why she shouldn't succeed.

Permira has timed its offer well to take advantage of a 10-year low in the share price. It has also come in at a premium sufficiently large to deter rivals and make WH Smith directors think about their responsibilities. However, this is only a preliminary approach, and it is subject to the usual due diligence, during which time, if the precedent of many private equity bids is followed, the price will be steadily chipped away.

Interestingly, WH Smith is being advised by the same investment banking boutique, Greenhill, as acted for Debenhams when it was approached by Permira. Greenhill seems to be following the same tactic: getting the name and the price of the bidder out into the market quickly to establish whether there might be the interest to generate an auction.

The difficulty Kate Swann has got in telling Permira to get lost is the question of whether this is an offer shareholders would want to consider. Permira would have us believe that for the answer to be no, she would need to demonstrate similar value in double quick time. Ms Swann is due to present interim figures on Thursday, but she's not yet past the operational review stage of her induction, and will struggle to come up with such a value creation plan on this scale.

None the less, if investors want to have a quoted retail sector left at all, then they must reject Permira's interest. The high returns made in private equity are often justified by way of the higher risks private equity players are prepared to take, yet how often do you come across an impoverished private equity investor? Impoverished stock market investors are on the other hand two a penny. If traditional, long investing is to have any future at all, then its followers must be prepared to take what the name implies ­ a long view. Otherwise they might as well join the rush into hedge funds and private equity along with everyone else.

jeremy.warner@independent.co.uk

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