Press Report : A summary of the DBIS Inspectors’ Report on MG Rover

Graeme Brown, Birmingham Post, 13th September, 2009

Chapter 1: Introduction

Longbridge manufacturer MG Rover Group went into administration on April 8, 2005. A statement of affairs sworn by two Directors of the company on May 16, 2005, estimated that it had a deficiency as regards creditors of £1.29 billion when it entered administration.

On May 31, 2005, Gervase MacGregor and Guy Newey, were appointed by the Secretary of State for Trade and Industry as Inspectors to investigate the affairs of Phoenix Venture Holdings.

Chapter 2: Rover at the beginning of 2000

In early 2000, MGRG was producing the old Mini, the Rover 25, the Rover 45, the Rover 75, the MGF and various Land Rover vehicles, under the stewardship of BMW, with plants in Longbridge, Cowley, Solihull, Swindon and Gaydon.

The company had managed to turn a profit twice in the proceeding six years, including an after-tax loss of £2.1 billion in 1999.

Chapter 3: The sale of Rover

This chapter first considers the approach made for MGRG by Jon Moulton’s Alchemy Partners in 1999 even though they were not ‘car industry people”.

A memorandum of understanding was negotiated between BMW and Alchemy on March 16, 2000, but soon collapsed, after a proposal of a £1 billion loan from BMW was turned down, leaving Phoenix as the only bidder.

On April 14, 2000, John Towers and John Edwards sent BMW a letter setting out an offer for MGRG, and an agreement was thrashed out by May 9 for the nominal sum of £10, with the Phoenix Four investing a combined £240,000. BMW was to lend MGRG £75 million.

It quotes automotive expert Professor Garel Rhys, of Cardiff Business School, who said ‘… there was a chance that the Phoenix Consortium could ‘hold the line’ for five or six years, and if a joint venture was created it might be possible that the joint venture could have a close relationship with another car firm. However, it would not be possible for a car manufacturer of [MG Rover’s] size to succeed on its own.”

The report also shows that legal firm Eversheds earned £757,904 from the sale, while Deloitte were paid £6 million and stockbroker Albert E Sharp earned £750,000.

Chapter 4: The members of the Phoenix consortium

John Towers – joined Land Rover in 1988 and became a member of the main board of MGRG the following year. He was subsequently promoted to Group Managing Director in 1991.

Nick Stephenson – worked for many years at British Leyland. In 1996, Mr Stephenson became a member of the MGRG board with responsibility for design and engineering, a position he held until he left MGRG in 1999.

John Edwards – from 1987 Mr Edwards owned and managed a Rover dealership in Stratford-upon-Avon named Edwards of Stratford. He was appointed as a Director of Techtronic on April 13, 2000.

Peter Beale – the chartered accountant was appointed as a Director on July 1, 1989, and was appointed as a Director of Techtronic on April 13, 2000.

Chapter 5: Rover under new ownership: events between May 2000 and June 2001

Having been little opportunity for due diligence after the collapse of the negotiations with Alchemy, the members of the Phoenix Consortium had to learn about what they had actually bought.

It quotes Nick Stephenson: ‘We took over an entity that was not a company … strictly there was this legal entity, Rover Group, but it did not exist on the ground. It was operating out of about eight sites, Longbridge, Bickenhill, Warwick, Gaydon, Cowley, so on – and all the national sales companies in nearly every country in continental Europe. It did not have a secure supply base. Every single supplier that supplied the company turned up on our doorstep wanting to know what the hell was going on.”

Chapter 6: Development agreement with St Modwen

St Modwen made a £100,000 payment to Landcrest, which was owned by former Techtronic Director Brian Parker.

The payment was made to be introduced to MG Rover but was made while Mr Parker was a Director.

The report found that Mr Parker breached his fiduciary duties and while compiling the report investigators said they were ‘provisionally minded” to describe it as a bribe and when they approached Mr Parker with the allegation he did not dispute it. Later on St Modwen agreed a deal with AWM for the land and paid St Modwen £100,000 to cover the expense.

Chapter 7: Project Platinum

This considers how a company owned by the Phoenix Partnership and HBOS came to acquire most of BMW’s Rover loan book, which eventually became MGR Capital.

£22 million is still left over from the collapse of MGR and there have been calls for this cash to be redistributed among former Rover workers who lost their jobs.

The report details how Northfield MP Richard Burden wrote to Mr Towers about stories in the Daily Telegraph arising out of the publication of PVH’s 2002 financial statements.

Mr Burden noted that one of the claims made was that it was not contributing to the survival of the core operations but that it was declaring dividends to the individual and corporate owners. He asked why it was being kept outside the group.

The report disputes explanations advanced by Mr Beale to the Trade and Industry Select Committee and said the Phoenix Partnership was involved in the joint venture because its members (other than Mr Howe) wanted the profits to accrue to them, not because that was the ‘only option that was left.”

Chapter 8: Group structure after 2000

This chapter outlines the structure of Phoenix Venture Holdings (PVH) and Techtronic, the company vehicle used to buy the Rover Group.

Chapter 9: Property and share transfers at the end of 2001

In December 2001 steps were taken to transfer some companies from MGRG to other companies owned by PVH’s subsidiary firms, of which MGRG had no interest – including the title to MGRG’s Longbridge site to subsidiary firm Property Holdings.

The 228 acres of Longbridge land was later sold on to Advantage West Midlands in 2003. Buildings measuring 651,206 square feet were leased back from AWM for a ‘peppercorn” rent, and PVH earned a total of £59.96 million to go towards debts.

However, MGRG received only £40.49 million of the proceeds, as that was the book value of the sale to Property Holdings.

The report states: ‘While MGRG obtained the benefit of the sales to AWM and Redman Heenan in cash terms, the transfer of the Longbridge land to Property Holdings will nonetheless have disadvantaged MGRG and its creditors. Had it remained the owner of the land at the time of the sales to AWM and Redman Heenan, MGRG, would have been entitled to the full proceeds from the sales as of right.”

Chapter 10: Project Lisa

‘Project Lisa” was the name given to a scheme to raise money own use vehicles (OUVs) which were used by staff for demonstration purposes and vehicles used for promotional purposes – ‘leaseplan vehicles” which would generally be leased out through daily rental companies such as Europcar.

Project Lisa involved the transfer of the OUV and leaseplan vehicles to two newly-established companies, a move which was taken at the suggestion of Deloitte.

There was a proposal that this be owned by the Pheonix Partnership, even though it was eventually made a part of MG Rover Group because of a tax problem.

The report’s author’s said: ‘We conclude that the reason the leaseplan company was to be owned by the Phoenix Partnership (and not MGRG) was that the four members of the Phoenix Consortium saw an opportunity to make money for themselves.”

Chapter 11: Aircraft: Exploiting tax losses

MGRG incurred trading losses from 2000 until 2004.

Under corporation tax legislation, trading losses in one company can be set against profits arising in the same accounting period in another UK group company.

‘Project Aircraft” was a scheme under which investments were made in a finance company called MCC Leasing which leased two Boeing 767 aircraft so that the losses in the group could be used to eliminate tax liabilities.

Chapter 12: Project Patto

Project Patto was another scheme from which the members of the Phoenix Consortium could potentially have derived very substantial benefits, based on a £427 million interest-free loan from BMW when Techtronic acquired MGRG in May 2000.

Chapter 13: The transfer, management and sale of the parts business

The Rover parts business became Xpart after it was hived off from the main company as part of talks to sell up to Alchemy, but was later taken on as part of the PVH deal.

This chapter examines the management of Xpart – which had its profits shared between Xpart and MGRG – and the sale for £32 million to Caterpillar Logistics Services in 2004.

Chapter 14 : Edwards Cars Limited: Financial support and acquisition

The report said that ‘one of the purposes for which PVH used its income was to support Edwards Cars”, which was owned by Mr Edwards and his wife and which was later acquired by Phoenix for a nominal sum.

Between December 2000 and the end of 2002 Edwards Cars charged PVH sums totalling £3,877,958 (excluding VAT), and between January 2003 (when Edwards Cars became a subsidiary of PVH) and April 2005 PVH paid £1,718,953 to Edwards Cars.”

In addition, Phoenix-owned Techtronic paid £308,000 (excluding VAT) to Edwards Cars during 2000. The report said: ‘Without the financial support it received, Edwards Cars would have incurred very large losses and been most unlikely to be able to continue trading.

‘We can see that there may well have been a commercial justification for giving Edwards Cars some financial support. However, we do not think that support on the very large scale in fact provided can have been commercially justified.”

Chapter 15: The reasons for the group structure

The Phoenix Four changed around the structure of the company and its subsidiaries, creating an enormously complicated structure.

At the time, they claimed this was to create more management focus on individual businesses but the report concluded that this was done to ring-fence parts of the business from MGRG liabilities and ended up reducing transparency, contrary to claims.

Chapter 16: Financial and trading performance of MGRG between 1999 and 2004

This chapter looks at the financial and trading performance of MGRG between 1999 and 2004. The turnover of the group, having fallen dramatically in the year it was sold by BMW, rose until 2002 and then dropped again in the period leading to administration. Losses followed a similar trend, starting at £917 million in 1999 reducing until 2002 but rising again to hit £118 million in 2004.

Chapter 17: Changes in the boards of the main companies between 2000 and 2005

This chapter follows movements of the Directors and Executives on the various companies, including Brian Parker, Richard Ames, David Bowes, John Sanders, Rod Ramsay and Nigel Petrie.

Chapter 18: Powertrain

This looks at how in 2000, shortly before the sale of MGRG to holding company Techtronic, what had been MGRG’s engine and gearbox manufacturing business was transferred to Powertrain, a shell company bought for the purpose.Powertrain was subsequently acquired by Techtronic in 2001.

The report asks why Powertrain was purchased by Techtronic and not MGRG – the report’s authors were told that Powertrain was acquired by Techtronic, rather than by MGRG, partly because Ford wanted to ensure that Powertrain would continue to supply its engines in the event that MGRG failed.

Chapter 19: Joint ventures

While loans from BMW meant there was no prospect of MGRG failing in the short term, longer-term survival depended on it successfully concluding a joint venture arrangement.

This chapter charts MGRG and Powertrain’s attempts to court partners in Eastern Europe, the Middle East and Asia, and China.

Chapter 20: The events leading to administration

A Dr Li provided consultancy services to MGRG during 2004 and 2005 and companies associated with her were paid £1.69 million for her services over a 15-month period. These sums were ‘much too high” and the man primarily responsible for them was Mr Stephenson ‘even though he had a personal relationship with Dr Li”. Most of the other Directors of the companies paying the relevant fees ‘were not consulted” and only one Director – Mr Beale – was told of Mr Stephenson’s relationship.

Chapter 21: Financial rewards

Phoenix obtained ‘large, and we say unreasonably large, financial rewards, totalling tens of millions of pounds”.

They also undertook transactions to allocate assets to companies in the group other than MG Rover and in which MG Rover had no interest.

Phoenix had known that there was a real risk that MG Rover would fail and that the expenditure and risks that they were to bear in acquiring the company were ‘relatively insubstantial”.

Chapter 22: Aspects of corporate governance

This chapter refers to minutes of meetings which refer to Directors who were known not to be in attendance and other ad hoc meetings which some Directors of MGRG were given no notice of – they could not contribute to some decisions.

Chapter 23: Financial statement and audit

This chapter looks at Deloitte’s role as auditors of the group.

The report’s authors state: ‘It is clear that the total fees to be earned from the group as a proportion of Deloitte’s total income were nowhere near the level that would be regarded by the ICAEW as unduly large. Furthermore, it is apparent that Deloitte’s own procedures for safeguarding its independence and objectivity met, or even exceeded the standard required by the ICAEW.

‘While the ratio of Deloitte’s non-audit fees to audit fees since their appointment as auditors to the Group might be perceived as having been a threat to their independence and objectivity, we have found no evidence.”

Chapter 24: Evidence Eliminator

The report said Phoenix Four member Peter Beale installed Evidence Eliminator on his computer the day after the inquiry was announced in 2005 so he could delete material before it could be assessed by the inspectors.

Mr Beale ran the software programme despite being aware the inspectors intended to review contents of his computer as part of the investigation, it said.

Evidence Eliminator is a software programme which claims it ‘deep cleans” a computer’s disk of any sensitive material, the report said. ‘Evidence found on the image taken of Mr Beale’s computer indicates that Mr Beale deleted a sub-folder called MG Rover from his hard disk between 2 and 20 June, being the period after our appointment but before Mr Beale’s computer was imaged.”

Chapter 25: Conclusions

The report said that ‘inaccurate and misleading explanations” were given about the state of the MGRG business… ‘For example, MPs and others were led to believe in 2003 to 2004 that the members of the Phoenix Consortium had invested considerable sums and taken substantial financial risks when MGRG was acquired and that the sums which had been reported as paid to them did not come from MGRG but from separate Phoenix sources. In reality, the relevant payments to or for the benefit of the members of the Phoenix Consortium can for the most part be traced back to interest paid by MGRG and the exploitation of MGRG’s tax losses, and the members of the Phoenix Consortium had invested relatively little in the group and undertaken only limited risks”.

The Phoenix Four had transferred various properties and subsidiaries of MG Rover ‘at less than full market value”. One deal led to MG Rover incurring liabilities of £16 million.

During negotiations with Chinese company SAIC there was an attempt to insist on Phoenix rather than MG Rover Group holding shares in the joint ventures which were envisaged.

The reason that Mr Beale, Mr Towers and – to a lesser extent – Mr Stephenson wanted Phoenix to be the shareholder ‘was probably to ensure that the value of the shares would accrue to that company (and, hence, themselves as its Directors) regardless of what became of MG Rover Group”.

The report said that Directors of companies within the group were not always invited to board meetings, often being given no notice of ‘ad hoc” meetings.

[Source: Birmingham Post]

Clive Goldthorp

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