End of Rover shatters lives and dreams

By Dominic O’Connell and John Waples
The flags are flying at half mast at Longbridge as up to 20,000 workers prepare for a future on the dole

Translate the following first eight paragraphs into Chinese.

THE famous Union flags at the front gate of Longbridge, headquarters of MG Rover, were flying at half mast on Friday morning. The few staff remaining at the factory were obviously well-informed; a group of workers trailed past the gates, dragging on a trolley tools that would no longer be needed.

Hours before the official announcement, MG Rover’s 6,000 employees knew the game was up. A century of carmaking had been brought to a juddering halt. All week they had been in limbo, hoping against hope for rescue from the other side of the world, a million-to-one-shot deal with a Chinese company, Shanghai Automotive Industry Corporation (SAIC).

The odds, forecast by union leader Tony Woodley, proved accurate. On Thursday night Tony Blair, Gordon Brown and Patricia Hewitt, the secretary of state for trade and industry and Longbridge’s self-appointed Mother Teresa, had been told of the final nail in Rover’s coffin, a rejection letter so comprehensive it gave Labour no more room to wriggle.

The government had prayed for any crack that would have allowed talks to carry on, at least as far as the looming chasm of the May 5 election. Another £25m loan had been made ready to keep Rover workers on full pay until voting day — a sum that would follow the £6.5m already lent.

To the ministers’ chagrin, the extra was never needed. Thursday night’s verbal rejection was confirmed in writing first thing on Friday. Chen Hong, SAIC’s president, had arrived back in Shanghai from a business trip and signed the letter, which was faxed to Hewitt’s office.

Chen pointed out that SAIC had turned down the British in letters to DTI official Mark Russell on March 29, and again on April 4 and 5. Now it was doing so again.

“SAIC does not believe that MGR and Powertrain (Rover’s engine business) could emerge from the administration effort in a state which would make any acquisition of or joint venture involving the MGR and/or Powertrain businesses an attractive investment proposition for SAIC. We have therefore concluded that we are not willing to acquire either the whole or parts of the MGR or Powertrain business,” Chen said.

Calls to West Midlands Labour MPs began at 7am, before the final receipt of the fatal letter. Rather than canvassing for the coming election, they were to spend the day consoling workers leaving Longbridge for the last time, and defending the government’s record.

Hewitt held a crisis meeting with Blair and Brown. The three agreed there would be a financial aid package for workers of about £150m — more than £40m for redundancy payments, £40m for suppliers, £24m for other businesses affected by the collapse and £50m for retraining — and that they would go to Birmingham that afternoon to announce it. Brown would postpone a long-planned trip to Washington.

At Longbridge, the letter was a crushing blow for the administrators from Price Waterhouse Coopers (PWC) — Ian Powell, Rob Hunt and Tony Lomas — but one they had seen coming. They had spent the week labouring on a proposal that would answer the Chinese group’s concerns. They had even got as far as sending a set of proposals and a proposed agenda to SAIC for a planned meeting during this week’s Shanghai Motor Show.

In the end the obstacles proved insurmountable. To plug the potential redundancy and pension liabilities, and to recapitalise the business would have taken several hundred million pounds. “It would have needed a lot, I mean a lot, of money,” said Lomas.

The bad news was beginning to filter through the Longbridge grapevine. Groups of workers and their families, many waving Union flags, began to gather at the gates. Adrian Robinson, 39, a distribution worker, said it was “the death of this place. I have three little girls to take care of. This really is it — our Black Friday.”

Lillian Brindley, 61, wife of 15-year Rover worker Alexander Brinley, was bitter. “I blame Towers (John Towers, MG Rover chairman), and Blair should have done more instead of sitting on his arse. We’ll have to sign on now, we’ve never done that before.”

There was anger at the Phoenix Four, the group of businessmen led by Towers who bought Rover for £10 five years ago.Digby Jones, head of the UK’s biggest business organisation, the CBI, said: “The conduct of taking £40m out while losing £600m and making 6,000 people lose their jobs is appalling. The sky should be the limit when you are delivering success, but when you preside over failure you should look long and hard into your own soul, and I hope these people are doing that.”

The Phoenix Four were defiant to the end. They did not give interviews, but issued a statement. “In May 2000, when Rover was saved from BMW’s liquidation process, a lot of people said that the business could not last for more than 14 months. The management and employees of MG Rover have defied those conventional predictions and worked tirelessly to create a positive result. Almost five years later, and within weeks of what we believe to be its natural long-term outcome, it is devastating to be stopped at the final hurdle.”

At 3pm, the administrators confirmed 5,000 redundancies. Business leaders in Birmingham said the final tally of job losses could be closer to 20,000.

THE fallout from the Rover debacle has already spread far from its West Midlands heartland. For more than 60 years the Wilcox family has run a Rover dealership in Wotton- under-Edge, a picturesque town on the edge of the Cotswolds.

They have stuck with the manufacturer through good times and bad, but now their loyalty could leave them nursing an immediate £60,000 bill and the likelihood of more to come. The family is among more than 200 Rover dealers stuck with cars they have agreed to buy at a set price, but that are now, thanks to Rover’s problems, worth considerably less.

To compound matters, Rover has reneged on its agreement to underwrite two-year warranties. Tim Wilcox said his garage, AE Wilcox, which sells about 250 Rovers a year, had been associated with the manufacturer since 1937. This week the future was far from clear. He said: “I don’t know what is going to happen.”

He is owed £10,000 in warranties and a further £50,000 in bonus payments from Rover. The Wilcox family may also have to bear additional costs of refurbishing their premises to take on another franchise. This could cost between £250,000 and £1m.

Paul Keen, managing director of Simonstone, Bristol’s largest multi-franchise dealer, agreed to start selling Rover cars just two-and-a-half months ago. During several meetings with Rover’s senior management he was given an upbeat picture of the group’s future. Now, like Wilcox, he has been left in the dark.

Lookers, the quoted car dealer, decided last year to serve a two-year notice on Rover to close its four dealerships. Ken Surgenor, the group’s chief executive, has made a £2.8m provision in the group’s accounts to cover the closures. He said Rover had been deeply unhappy and had accused him of “abandoning a sinking ship”. This week Surgenor wrote to his customers saying the firm would cover the cost of Rover warranties.

Pendragon, the largest owner of Rover dealers, with 15 sites, is likely to take a £2m hit.

THE administrators from PWC — Powell, Hunt and Lomas — are accustomed to sorting out complex corporate mazes. Lomas led the untangling of Enron’s labyrinth of European business interests.

But MG Rover is a one-off. Few company insolvencies are announced by ministers on prime-time television, or attract a generous government loan that will keep all staff at home on full pay for a week.

The trio will now concentrate on breaking up MG Rover and maximising returns for the company’s creditors. On Friday they were still hopeful of finding a buyer for MG’s sports-car operation, but bidders believe that a sale could be blighted by some of the redundancy and pension liabilities that might still attach to the business.

“I don’t think there is much hope,” said Jon Moulton, managing partner of Alchemy, the venture-capital group that tried to buy the company five years ago and had been tipped as the leading contender.

Lomas said it was not part of their remit to investigate the finances of Phoenix Venture Holdings, the company at the top of the MG Rover empire. But the administrators are required to report to the DTI on the behaviour of the directors, and the government is expected to announce an independent inquiry by Sir Bryan Nicholson.

The Chinese may yet have a role to play. Lomas said he would this week write to them to gauge their interest in buying Rover’s production assets from the administrator. Purchase of the production lines for the 75 and 25 models would fit with SAIC’s plans to produce its own cars in China, and with the other assets it bought from Rover last year.

The first proper assessment of Rover’s finances is unlikely to see the light of day for about three months. Under insolvency law, the administrators have to receive a “verified” statement of the companies’ finances from its directors, which will be presented to a creditors’ meeting, likely to take place in late June or early July.

The administrators will also consider whether they have any potential claims against the company’s directors, its auditors, Deloitte, or possibly members of the government.

Richard Astor, a barrister who specialises in commercial law, said there was a host of potential legal claims. “I would be looking at actions against the auditors, the directors, and even ministers. They have all, in my opinion, been contributing to the illusion that this was a viable company,” he said.

Deloitte declined to comment in detail yesterday, but pointed out that its most recent report was on Rover’s annual accounts for 2003, and that in them it made comment on the company’s status as a going concern relying on the Chinese deal. It did not qualify the accounts.

The biggest victims of the Rover collapse may not yet have been identified. The MG Rover Group pension fund, which is £430m in deficit, will be handed to the government’s new Pension Protection Fund. It has a maximum payout of £25,000 — a devastating blow for those long-serving and white-collar workers who had been looking forward to much larger payouts and a comfortable old age.

Additional reporting by Aaron Pan

PHOENIX FOUR SET FOR NEW SCRUTINY ON ROVER ACCOUNTS

MG ROVER’s collapse will switch scrutiny from the illusory rescue deal to the hard facts of its demise — with the Phoenix Four likely to be first in the spotlight.

John Towers, John Edwards, Peter Beale and Nick Stephenson bought MG Rover from BMW for £10 in May 2000. They and other directors have since taken close to £40m in salaries, pensions and other benefits, and been accused of enriching themselves while the company withered.

The consortium split MG Rover into 28 subsidiaries under a single parent, Phoenix Venture Holdings, with other operations outside the umbrella group. Administrators have been appointed only to three main subsidiaries, MG Rover, Powertrain and MG Sport and Racing.

Tony Lomas, one of the administrators, said yesterday it was not part of their remit to undertake a detailed investigation of the wider Phoenix group, but there will now be an independent inquiry by Sir Bryan Nicholson, chairman of the Financial Reporting Council.

Reports last week centred on the apparent mismatch between Phoenix’s once-abundant resources and its declared losses. The former exceed the latter by up to £400m.

The group was set up with the cushion of a £427m tax-free loan from BMW, and given £500m worth of cars. It took on more than £200m in cash from MG Rover and Powertrain, and raised £174m from the sale of land and the parts business. It received £67m from SAIC last year, and about £20m from another potential Chinese partner, Shanghai Brilliance.

These resources of £1.4 billion dwarf reported losses of £611m to the end of 2003. Rover losses in the past 15 months, for which there are no published accounts, could add up to another £375m, given PWC’s verdict of losses of £25m a month.

The £400m discrepancy could be explained by R&D spending or by other accounting treatments.

Professor Chris Higson of the London Business School, who reviewed the accounts last year, said he did not expect the administrators to uncover any ‘gross’ fraud. He said: ‘It is difficult to reconstruct in full the path of transfers and sales of assets between firms from the published accounts. I do not expect to see evidence of illegality, partic- ularly as Phoenix was advised by leading accounting and law firms.’

CHINESE GEAR UP TO BUILD ROVERS

THE elite of the automotive industry will converge on Shanghai this week for the city’s biennial motor show, writes Dominic O’Connell.

This year, all eyes will be on the stand of Shanghai Automotive Industry Corporation (SAIC), China’s largest carmaker and MG Rover’s one-time would-be partner. SAIC pulled out of joint-venture negotiations last month after uncovering the shaky state of the British group’s finances. This triggered the collapse of MG Rover.

But SAIC came away from the talks with some key Rover assets. Last year it paid Phoenix Venture Holdings, Rover’s parent company, £67m for the intellectual property rights of the 25 and 75 models, and the K-series engine, which powers Rover cars.

Securing the rights has taken SAIC some way towards its goal of launching its own car brand and establishing a global presence.

Although it is No1 in China’s domestic market, it makes cars in joint ventures with General Motors and Volkswagen. It has no brands — or designs — of its own, galling for such an ambitious company.

There is disagreement over whether SAIC now has the rights to the Rover brand. Sources close to the company said it had acquired licensing rights, although this is rejected by BMW, the ultimate owner of the brand, and by MG Rover itself.

But sources in China believe SAIC could now use its Rover assets to start production of Rovers for domestic sale. The Chinese could either wait until MG Rover goes into liquidation and buy the Longbridge production lines for export to China, or use its intellectual-property rights to set up its own production lines.

The sources pointed out that plans for adapting the models for Chinese conditions were well under way, with teams of Chinese engineers working in Longbridge for several months, and more than 100 Rover employees working in Shanghai.

It is understood that SAIC has well-advanced plans for a stretched version of the Rover 75 sedan, a model that would appeal to size-conscious Chinese buyers. Last year Rover itself launched a ‘limousine’ version of the 75, 10 inches longer than the standard saloon.