Commons to investigate dealings by Rover chiefs

MPs are to investigate allegations of asset-stripping aggainst the consortium of West Midlands businessmen that bought Rover from BMW three years ago for £10.

The Trade and Industry Select Committee is to examine the structure of Phoenix Venture Holdings, which is the parent company of MG Rover, as part of a wider review of the British motor industry and its dealings. The investigation is in response to mounting concern about the way MG Rover's valuable property and car-financing operations have been hived off into separate companies from the group's car-manufacturing division at Longbridge in Birmingham.

There has also been criticism of a £13m payment into a trust fund set up for the benefit of the Phoenix directors and their families at a time when MG Rover is losing more than £100m a year.

Martin O'Neill, the Labour MP who chairs the select committee, said yesterday that the inquiry wouldbe wide-ranging and would involve all aspects of the British car industry. But he added: "Obviously, we have to pay special attention to the last remaining British-owned volume car maker and the way it is structured, its relationship to foreign partners and how investment in new models is going to be financed in the future."

He said the inquiry would examine the way that parts of the former Rover business were split into separate companies, although it would be prejudging the issue to say simply that there had been asset stripping.

BMW sold Rover to the Phoenix consortium for a symbolic £10 in May 2000 when it also handed over a £500m dowry to ensure its short-term future. Phoenix was led by a former Rover chief executive, John Towers, and its three other shareholders were local businessmen: Nick Stephenson, Peter Beale and John Edwards. The four men hired a chief executive, Kevin Howe, who also became a director.

The four original directors kept 40 per cent of the company and gave 60 per cent to trusts representing MG Rover's 6,500 employees and its dealer network. But the directorskept 100 per cent of the voting rights. As compensation for giving up 60 per cent, the four directors each received a £2.5m interest-bearing loan note from Phoenix, which has so far paid £1.2m in interest and is due to be repaid by 2005.

The existence of the loan note has stirred controversy but what has caused more anger is the £12.9mPhoenix has paid into the trust fund set up for the benefit of the four directors. The existence of the fund came to light last month shortly after MG Rover reported a £111m loss for 2002.

There has also been unease over other manoeuvres at MG Rover, such as the decision to split its property assets from its vehicle manufacturing. An £11m profit was made last year after 42 acres of the sprawling Longbridge site were sold to an enterprise agency. There was also the £340m purchase of Rover's vehicle leasing arm, Rover Financial Services, from BMW by a company called MGR Capital. MGR Capital has nothing to do with MG Rover but is owned by a company called Phoenix Partnership and HBOS, the bank that put up the money for the deal.

Phoenix Partnership is owned by the four original founders of Phoenix, and has proved a highly lucrative business. In the 17 months to the end of 2002, MGR Capital made £13.7m profit on turnover of £33.3m and paid £457,000 in dividends to its shareholders.

Car companies very often rely on profits from their finance arms to subsidise their manufacturing operations. But Professor Garel Rhys, of Cardiff University's automotive industry research unit, said the Rover Financial Services deal "cuts off the vehicle maker from a very substantial inflow of cash".

A spokeswoman for Phoenix said the finance arm had been acquired separately because it was "not appropriate to have the debt on Phoenix's balance sheet". She also defended the loan note on the basis that the four directors had taken a financial risk when they bought Rover and the trust fund was set up because there was no pension provision in place.

As for the land deals, the spokeswoman said Phoenix's annual report spelt out that the profits would be used to help to fund new MG Rover models. "How can you describe that as asset stripping?" she said.