How BMW bought Rover

BUSINESS WEEK
International Business

It was the closest relationship between any Japanese and European carmaker. It began with a modest licensing agreement Honda Motor Co. made with Rover Group Ltd. nearly 15 years ago. The partnership blossomed in 1990, when Honda bought a 20% stake in Rover and the British company took a 20% stake in Honda's British operations. By combining Honda's engineering knowhow with Rover's design skill, the Japanese partner turned out to be a blessing for Rover.

Then, seemingly out of nowhere, BMW zoomed onto the scene. On Jan. 31, the German carmaker announced it would buy the remaining 80% of Rover from parent British Aerospace PLC (BAe) for $1.2 billion in cash. Overnight, the outlook changed for all players, and the European auto industry will never be the same. In today's cutthroat global market, it's clear that luxury carmakers have to offer a full line of products to survive.

ONE FELL SWOOP. With a new CEO and amid a strong U.S. comeback, BMW is on a roll. By grabbing the venerable British nameplate, in one fell swoop it has doubled its European market share, to 6.4%, and filled out its product line with Rover's four-wheel-drive vehicles and small cars, the Mini and the Metro. "There's a short way to get a sport-utility vehicle and a long way," explains Victor H. Doolan, president of BMW of North America Inc. "We chose the short way."

The deal works for BAe, too, giving it needed cash while relieving it of $1.4 billion of debt and off-balance-sheet financing. Dumping Rover lets BAe focus on its core defense and aerospace units.

But Honda is reeling. Says Honda Motor Europe Ltd.'s President Shojiro Miyake: "We didn't prepare for this case at all." Honda had been planning to expand in Europe, using Rover's suppliers and buying more parts from Rover itself to boost local content. Officials aren't saying what they'll do next. But analysts in Tokyo figure the company will withdraw from Rover and go it alone in Europe.

Even so, the tie between Honda and Rover won't be quickly sundered. The Rover 600 series of four-door sedans, launched last April, is essentially a rebundled Honda Accord, with engines from Honda's $555 million plant in Swindon, Wiltshire. Rover's 200 and 400 models, representing one-third of its $6.5 billion sales, are based on the Honda Concerto subcompact. In turn, Rover assembles the Concerto for Honda in Britain. And last November, Honda began distributing Rover's four-wheel-drive Discovery in Japan as a Honda Crossroad.

Honda needs Rover, too. The 18-month-old Swindon plant, for instance, relies on Rover for all its major body parts. And Honda's European sales alone don't generate enough volume to keep its five-year-old engine operation running efficiently. Likewise, Honda U.K. is Rover's biggest supplier. That's why BAe CEO Richard H. Evans believes Honda won't serve divorce papers on Rover quite yet. "It's not in Honda's interests to walk away," he reasons.

Ultimately, BAe's choice came down to simple arithmetic: Honda's final offer valued Rover at just $900 million, compared with BMW's bid of $1.2 billion. It was a painful way to end what was one of the most promising partnerships in the industry. But eager to soothe hurt feelings, BMW CEO Bernd Pischetsrieder is already planning to meet with Honda honchos. At least for now, Honda may decide that it's a workable marriage of convenience.