EC to revive Rover sweeteners issue

THE EUROPEAN Commission is poised to renew its demand that British Aerospace repay the pounds 44.4m in hidden sweeteners used to clinch the purchase of Rover from the Government four years ago.

Sir Leon Brittan, the EC commissioner for competition, is in the final stages of completing a fresh report into the affair for submission to the 17-strong college of commissioners.

The report, which is certain to recommend that BAe repay the sweeteners, may be presented as early as Friday, when the Commission meets for the last time before its summer recess.

Failing that, the report will not be considered and voted upon until September at the earliest, when the Commission returns to work.

Should BAe be forced to repay the money it would be a further blow to the embattled defence, aircraft, property and cars group where John Cahill took over as chairman in May from Sir Graham Day.

Sir Graham was appointed to replace Roland Smith after the failed pounds 432m rights issue last September.

BAe's share price has halved from a high earlier this year of 379p amid growing fears of a dividend cut and the huge rationalisation costs it would face if it were to close down the loss-making regional aircraft division.

There is also persistent speculation that BAe may seek to sell Rover before August 1993, even though this could render it liable to repay part of the pounds 547m

in state aid injected into the business when it was sold by the Government.

Sir Leon's new investigation into the sweeteners affair was launched in February immediately after the European Court of Justice in Luxemburg ruled, on a legal technicality, that BAe did not have to repay the money.

The court upheld BAe's appeal against repayment on the grounds that the Commission had failed to follow correct EC procedures in demanding the return of the pounds 44.4m. However, it did not reject the substance of the Commission's finding that the sweeteners amounted to illegal state aid.

BAe completed the pounds 150m purchase of Rover in August 1988 after the commission approved the government cash injection. It subsequently emerged, however, that Lord Young, then Secretary of State for Trade and Industry, had agreed to the additional payment of the sweeteners without the EC's consent.

Rover crashed to a pre-tax loss of pounds 83m last year and has been hit this year by the continuing slump in UK car sales. Despite this a string of foreign car manufacturers, including Volkswagen of Germany and Italy's Fiat, are thought to be interested in buying the company.

If BAe disposes of Rover before next summer it could be forced to repay up to pounds 400m in state aid. But there are circumstances in which it could escape repayment.

In July 1988, Lord Young wrote to BAe saying that 'a situation could well arise where it would be appropriate and in the public interest for government to authorise a disposal, without penalty for BAe, within five years'.

He wrote another letter to BAe in the same month noting its concern that 'certain disposals may become necessary' because of losses or financial deterioration at Rover. Lord Young added that in addition to considerations of public interest he would give weight to 'the financial performance of Rover Group and the implications for BAe'.

In a side letter to the purchase agreement with BAe, also dated July 1988, the Department of Trade and Industry said: 'It is and always has been the intention that in the event of any on-sale, HM Government and not the Commission should decide the amount of the penalty that should be applied.'

Despite this, EC approval would be required for any waiver of the repayment. Given the determination with which the Commission has pursued the sweeteners affair, it is certain that Brussels would closely examine any agreement that left BAe free to sell Rover without penalty.