'Businessmen run company like a business': that's the shocking truth about MG Rover

After the accusations of asset stripping, Tim Webb opens the bonnet on the tangled affairs of the consortium that saved the car maker

Birmingham, home of car maker MG Rover, is not high on the list of destinations recommended in the Lonely Planet guide to Britain: "Possibly the only thing of beauty to be created in the second half of the 20th century in Birmingham was the Mini at Longbridge in 1959," it says. The Mini has since been gobbled up by German car maker BMW, while, if last week's reports are to be believed, the future of the plant itself is now under threat.

John Towers was the man who, in 2000, formed the Phoenix consortium to buy the remnants of what used to be the Rover group for £10 from its previous owners, BMW. Once hailed as the saviour of the loss-making group, he now finds himself cast as the villain of the piece. Together with his three business associates, he has been quietly overhauling the structure of the group, in effect hiving off its profitable parts into separate subsidiaries. The core car manufacturing arm, MG Rover Group, led by chief executive Kevin Howe, lost £111m in 2002, according to the latest accounts. But it is now just one part of the tangle of subsidiaries and holding companies set up by Mr Towers.

Last week, this led some to level the charge of asset stripping at the new owners, who have been dubbed the "Phoenix Four". It makes a good plot line: evil businessmen screw poor workers. Except it's not true. As the Labour MP Richard Burden, whose constituency includes Longbridge, quips: "Next there will be a headline like 'Businessmen run company like a business shock'." So what is really going on at MG Rover?

What have the Phoenix Four done to Rover?

Under a newly created holding company, Phoenix Venture Holdings (PVH), the Rover group (minus the Mini and Land Rover units, which were sold before Phoenix was created) has now been split into MG Rover Group and nine other separate subsidiaries. The nine subsidiaries hold Rover's property assets, its leasing business and engine manufacturing subsidiary Powertrain, which have been generating profits.

This is borne out by the accounts for 2002. MG Rover Group's losses in 2002 may have stood at £111m, but PVH's losses were £16m lower than that, thanks to the other subsidiaries. Another subsidiary, MGR Capital - a profitable joint venture with the HBOS bank, which handles MG Rover's car financing loans book - is owned directly by the Phoenix Four and sits outside PVH. This restructuring has led to fears that the owners are trying to isolate, or ring-fence, the loss-making car business MG Rover, so that if it closed they would stand to profit from the rest of the group's assets.

So is the restructuring carried out by the Phoenix Four asset stripping or sensible corporate practice?

Privately owned companies set up new subsidiaries and change their names all the time, usually for tax reasons. Shay Bannon, partner in the business recovery group at accountancy firm BDO Stoy Hayward, says: "They are ring-fencing the assets from the trading operations in a similar way that a retailer will put its property portfolio in one holding and its operations in another."

MG Rover says that the money from each subsidiary is consolidated into the accounts of the holding company, PVH, which continues to fund MG Rover.

Concerned about the reports of "asset stripping", the trade unions Amicus and TGWU, which represent most of MG Rover's 6,500 workers at Longbridge, appointed a former Rover finance director in December to go through the books. He found nothing awry, according to Duncan Simpson, national representative for the automotive industry at Amicus, who says: "They have done nothing which is outside normal business transactions."

So if the Phoenix Four aren't asset stripping, what are they doing?

An argument could be made that, rather than preparing for the closure of the Longbridge plant by spinning off the profitable parts of the business, Mr Towers and his team are actually sensibly preventing the rest of the group going under if MG Rover closes. The last available accounts, for 2002, show that PVH has debts of more than £1bn (this includes a £427m interest-free loan from BMW, repayable in 2049 or sooner if PVH starts making profits). If the ring-fenced car-making business were to go bust, creditors could not try to reclaim their money from other parts of the group. Mr Bannon explains: "This means creditors could only have a claim on the assets held by the subsidiary with which they have been trading. If there is no cross default set up, creditors of the car manufacturing part of the business, for example, would not have recourse to funds held in the other subsidiaries in the group."

How well paid are the Phoenix Four?

Very. They are among the highest-paid directors of a car manufacturer in the world. The four directors set up a pension pot worth almost £13m in 2002, even though MG Rover's pension scheme for the rest of the workforce had slumped to a £73m deficit at the same time. They also granted themselves a £10m loan note payable by the company when they bought it. In their defence, they took a big risk buying the company.

Why is MG Rover loss making?

The car industry is highly competitive. MG Rover is up against global car manufacturers such as Ford that use econo-mies of scale to keep development and production costs down. Figures from the Society of Motor Manufacturers and Traders show that last year MG Rover sold just under 96,000 cars in the UK, compared with 379,000 by Ford.

But losses are being stemmed. In 2000, the same year Mr Towers took over, PVH lost £378m. In 2002, losses fell to £95m. MG Rover says results for 2003 will be a further improvement, but concedes it is still some way off breaking even. Professor Garel Rhys, Cardiff Business School's motoring expert, forecasts losses of £80m for 2003.

At the time Mr Towers bought MG Rover, it was expected to break even by 2002. One of the reasons it has not done so is the collapse of the joint venture with the Chinese conglomerate China Brilliance in 2002. Had it come off, the deal would have given MG Rover access to overseas markets and helped in launching new cars. In 2002, out of 148,000 sales, all but 7,000 came from the UK and Europe.

Professor Rhys says: "Since Phoenix took over they have done well in cutting costs. But producing successful models has become more expensive. You can only achieve economies of scale at around two million sales per year. Porsche is the only successful small car maker, and it is specialist and helps other companies with R&D. MG Rover needs to find as many joint ventures as possible to become viable."

Can MG Rover stay in business?

The next 18 months will tell. The last tranche of the loan from BMW was paid in 2002. In December, the CityRover car was launched to replace Rover's long-since defunct Mini Metro and give MG Rover a foothold in the small car market. The CityRover was a joint venture with the Indian car maker Tata, and dealers say it has been a success. MG Rover also brought out another smaller car, Streetwise, earlier this year. But the key to MG Rover still being around in five years' time is the success of the new mid-range saloon it plans to launch at the end of next year. Alan Pulham, director of new car dealers at the Retail Motor Industry Federation, is in no doubt this is the real test for the group: "It is crucial because it will be the first real new car with a completely new brand launched by the current owners. Everything else has been a face-lift of an existing model. The jury is still out until the next car."