Rover being readied for sale?

THE INDEPENDENT
Rover on the road into Europe in a second-hand sale by BAe: It is no longer a case of whether Britain's last car giant will be sold, but to whom, for how much and at what political cost, says Michael Harrison
Sunday, 9 August 1992

EXACTLY a year from Wednesday, British Aerospace will be free to sell Rover without having to repay all or any of the £400m in state aid that accompanied its controversial purchase of the car group in August 1988.

It is now widely assumed that Rover will indeed be sold. John Cahill, BAe's new chairman, has indicated that the group no longer regards cars as a core business. Once BAe has sorted out its problematic regional aircraft business, it intends to focus on its defence and Airbus activities. That leaves no room in the stable for Rover or BAe's property arm.

The prospect of the last British-owned volume car maker passing into fresh and almost certainly foreign ownership raises several questions. Who would buy it? How much would it fetch? Would it be sold as a single entity? And, most intriguingly, might BAe attempt a sale before next August's deadline?

On the face of it, Rover might not seem an obvious candidate for sale. The UK car market has declined catastrophically since 1988 and is unlikely to surpass 1.6 million units this year - down nearly a third on three years ago.

Rover's own performance has been distinctly lacklustre in the first half of this year, its volume of sales declining 18 per cent against a fall of just 4 per cent in the total market. Furthermore, it is heading for another trading loss this year of perhaps £25m to £40m.

In common with other UK car makers, Rover also faces a twin assault from the legislators: the European Commission wants to force down the price of cars sold in Britain, while the Inland Revenue wants to modify company car tax in such a way as to penalise employees given highly specified cars largely as a perk - precisely the sector of the market Rover has targeted.

However, these minuses are more than cancelled out by the pluses. In the past four years, Rover has moved decisively up- market and away from the price-cutting battles that dominate the bottom end of the volume car market.

It has also progressively reduced its dependence on the UK market: of the 420,000 cars it produced last year, 199,000 were exported.

Although nowhere near as efficient as Japanese producers, it has made great strides in productivity by closing excess plant, shedding 6,000 jobs and adopting Japanese-style working practices.

For a long time, the Range Rover and the more recent Discovery model were the only jewels in Rover's crown. But with the successful introduction of the 200/400 series, it has at last conjured up a car that has wide appeal and yet fits its niche marketing strategy.

Most importantly, Rover's link with Honda, the Japanese car maker which already owns a 20 per cent stake, will see its model development programme through to the end of the decade. The next fruit from that relationship, a replacement for the Maestro-Montego range, codenamed the Synchro, will appear next spring. The two companies have also agreed to build a replacement for the Rover 200-Concerto at Longbridge and Swindon. This is due to appear in the mid-1990s.

Finally, whoever buys Rover will inherit at least a 12-13 per cent share of the UK car market which, despite its present malaise, remains one of the biggest in Europe.

Unlike BAe's property assets, which could only be sold at a loss in the foreseeable future, Rover's market will bounce back because cars, in contrast to buildings, wear out quickly.

For all those reasons there is unlikely to be any shortage of prospective buyers. Heading the queue could be Volkswagen of Germany - which first expressed an interest in buying Rover at the time of its sale to BAe and reiterated that interest earlier this year - and Fiat of Italy.

Both have the money and the ambition. Fiat, in particular, is anxious to get its hands on a four-wheel drive marque with the cachet that attaches to Range Rover. Fiat held tentative discussions with BAe about a joint venture in this sector three years ago.

However, there are question marks against VW. First, the idea of buying Rover was championed most openly by Carl Hahn, who has now retired as chairman. Second, VW may have temporarily over-extended itself with the purchases of the Spanish car maker Seat and Skoda of Czechoslovakia and the decision to expand into eastern Germany.

If VW were to fall from the running, other European car makers such as Peugeot of France might take its place. The hostility of Jacques Calvet, Peugeot's chairman, towards the Japanese may be legendary but, equally, nothing might delight him more than to acquire a Japanese partner in the shape of Honda, especially if it could be presented as an inheritance by default.

Although the big battalions of the American car industry cannot be ruled out, it seems inconceivable that Ford would bid for Rover a third time, particularly given its painful experience of buying Jaguar. General Motors would maintain a watching brief, but its purchases of Lotus and a 50 per cent stake in Saab do not augur well.

That, of course, leaves Honda. It already owns 20 per cent of Rover and probably has pre-emption rights over the rest of the business should it come up for sale.

But Honda only took that 20 per cent stake reluctantly and as a sign of good faith. It has its own greenfield site at Swindon capable of producing 200,000 cars a year and has never shown any relish for an involvement with Rover beyond the sharing of model development costs.

Provided a change of ownership did not interfere with continuing model development, there is no reason to suppose that Honda would worry. In any event, it is short of money.

What then of the price? When BAe bought Rover in 1988, it paid only £150m and received a government cash injection of £547m in return. But if tax breaks on Rover's losses and the £44.4m in hidden sweeteners BAe received are included, the net cost of the deal to the taxpayer was nearly £470m.

When Honda bought its 20 per cent stake 18 months later, the deal valued Rover at £520m. Analysts estimate that if Rover were to be sold now it could fetch £450m to £650m. BAe could almost certainly sell Range Rover separately, but that might leave the rump of the business unsaleable.

The price Rover fetches could also depend on how it is sold off. In order to maximise its proceeds, BAe could invite competitive bids.

But a public scramble for the company would almost certainly lead to uncertainty over its future, and uncertainty quickly translates into dwindling sales. So the process of selling Rover might undermine its market value.

There would also be a political price. If Rover were to be sold for three or four times the amount BAe paid, it would not reflect well on the Government's business acumen.

If BAe tried to dispose of the company before next August without financial penalty, the political fall-out in London and Brussels would be greater still. One condition imposed on the original deal by the European Commission was that BAe had to retain control of Rover for five years or risk having to repay the state aid.

In the final hectic weeks of bargaining before the sale of Rover four summers ago, BAe wrung a written commitment from Lord Young, then Secretary of State for Trade and Industry, that: 'A situation could well arise where it would be appropriate and in the public interest for Government (sic) to authorise a disposal, without penalty for BAe, within five years.' Such public interest considerations might be triggered by a deterioration in Rover's finances or unforeseen losses.

Whether BAe chooses to invoke such a get-out clause is likely to depend as much on the circumstances of the group as a whole as on those at Rover.

If the City is right, BAe is not sustainable in its present form. In the past year its share price has slumped by more than a half, reducing its market value to less than £800m. It has quite ruthlessly used Rover as a vehicle to generate the cash that other divisions are squandering.

BAe has pledged to bite the bullet on its loss-making regional aircraft business before the end of this year - a move that could result in provisions of up to £750m to cover closure costs.

If at the same time there has been no improvement in the car or property markets and the European Fighter Aircraft programme is dead in the water, BAe might be facing financial meltdown.

In those circumstances, it could certainly argue that it would be in the 'public interest' to salvage Britain's principal defence contractor by allowing it to raise money through disposing of Rover. It could do this immediately or through a phased sale in which the money was paid up-front but control did not pass to the new owner until next August.

There are many in the City convinced that BAe has already hung a 'for sale' sign around Rover's neck and that the only question remaining is when it parts company.

The first opportunity to test Mr Cahill out on that proposition will come next month when the group announces its interim results for 1992.

Rover's 35,000 workers may be looking at more than just the bottom line.