For Phoenix, the SAIC negotiations now became critical to the maintenance of confidence in Rover. Why else would John Towers take such an extraordinary risk as he did when he re-emerged from a long period away from the limelight and contributed to a newspaper story that Rover was about to conclude a £1 billion “strategic partnership” with SAIC?
The Phoenix chairman must have known how this would alienate SAIC. But the stakes were so high that the company had little choice but to flaunt the SAIC presence in order to prop up confidence in Rover. Rover’s report and accounts for 2003, which appeared in November 2004, confirmed the severity of the situation. Phoenix’s auditor, Deloitte & Touche, made it clear that, without the prospect of the full SAIC deal, Rover was not a going concern. SAIC executives could not understand the British lack of discretion over what were supposed to be highly confidential negotiations and, to make matters worse, other Phoenix and Rover personnel continued to hype the prospect of a deal.
Notwithstanding, by early February there was the outline of a final agreement. SAIC was to pay a further £125m to Rover — not Phoenix. About £70m was earmarked for Rover’s pension fund. The total value ascribed to Rover, including the interim £67m deal, was therefore £192m — not bad for a loss-making minnow in the world of automotive leviathans.
Two joint ventures were to be created, one based in China in which SAIC would hold 70% and Rover 30%, the other in Britain with SAIC having 51% and Rover 49%. When Nanjing Automotive expressed an interest in participating, SAIC recast the deal so that Nanjing would hold 20% of the 70% Chinese-based venture stake. At no stage was SAIC going to assume the liability of the Longbridge workforce. Almost as soon as those parameters were drawn, however, the chances of a deal began to evaporate. For months SAIC had been asking for full due-diligence access to the books of Phoenix Venture Holdings (PVH). Early in March it was given that access, and immediately commissioned Ernst & Young to produce a detailed report on the state of PVH. Ernst & Young’s primary focus was the financial viability of MG Rover.
The Ernst & Young report was delivered to SAIC in mid-March. It was devastating. Ernst & Young found Rover had five fundamental and inter-related flaws: it was not selling enough cars, they were not at the right price, there was insufficient working capital, it had the wrong cost base and, finally, there was no guarantee that it would be able to continue financing the pension fund, where the £70m deficit disclosed in the 2003 accounts had now ballooned to more than £200m. The deal was dead.
The government quickly smelled trouble and, confronted by the spectre of collapse on the eve of a general election in May, it went into overdrive.
First, it allowed Rover to defer its Vat bill in anticipation of an SAIC deal, which amounted to a £25m saving. Patricia Hewitt, trade and industry secretary, dispatched senior officials to Shanghai. Then Gordon Brown, the chancellor, rushed to Shanghai and is believed to have promised tax holidays and Vat breaks in an effort to re-engage the Chinese.
On April 2 the government made another desperate attempt to salvage the deal, promising a £100m bridging loan. This was unreal. The government already knew there was no deal because three days earlier it had received a communication from SAIC stating it was no longer interested in investing in Rover. SAIC repeated the message on April 4 and April 5.
Even then the government bizarrely provided a £6.5m loan to cover wages for a week while it tried to “re-engage SAIC”, which it must have known was impossible.
Despite these desperate efforts the “English Patient” remained comatose, breathing only through the political life-support machine funded by British taxpayers.
Ironically, it was Rover’s suppliers who finally turned off the machine. On the afternoon of Thursday, April 7, a supplier of bumpers to the Rover 75 line refused to continue supplies. The 75 line was stopped immediately. Soon, so many suppliers were withholding deliveries that all the assembly lines were halted. Rover was dead.
Events now careered out of control. On the Thursday evening reporters were summoned to a DTI press conference at which Hewitt announced (inaccurately) that Rover had decided to call in the receivers. It was, she said, “a devastating blow to all those involved”. This was hardly surprising because only one year earlier she had said: “I’m very pleased with Rover’s performance. There was a big risk involved in setting up Rover again when it looked likely to come to the end of the road for car manufacturing.”
There were clearly questions to be answered. As Hewitt’s successor, Alan Johnson, said on May 31: “People want to know what happened.”
They deserve to know how much the government could have done to avert the collapse. Did Hewitt handle the negotiations professionally? How much did the government’s handling of the original Phoenix purchase contribute to the situation? Did the directors act illegally? Did the auditors do their jobs properly?
The various inspectors will ultimately make those judgments, probably in years to come. On April 15 Towers said he “did not feel guilty about the process we’ve been through; wind back the clock five years and I’d have done the same”. Pity, because had he been able to do so Phoenix might not have made a series of promises on matters of growth, product development, sales, or partnerships — none of which was ever delivered.
He might also have admitted that Rover had truly reached the end of the road as a volume car-maker the day BMW walked away. Phoenix — and it would be hard to conceive of a greater misnomer — merely steered it off the road and over the cliff. All that remained was a Chinese takeaway.
Extracted from End of the Road: The True Story of the Downfall of Rover, by Chris Brady and Andrew Lorenz. Published by Prentice Hall, £12.99
