BMW faces £2bn bill if Longbridge plant closes

Rover Crisis: As consumers respond to the car maker's plight, speculation grows that the German firm will restart negotiations with Alchemy
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BMW could face a claim of up to £2bn if Rover's Longbridge plant closes within the next two years, it emerged yesterday.

The liability raises further doubts about whether the German car-maker will sell Rover to the Phoenix consortium, which has pledged to maintain volume car production at Longbridge. There was growing speculation last night that BMW was preparing to ditch Phoenix and revive talks with the venture capital group Alchemy, which dramatically broke off negotiations a week ago. Phoenix said last night that financing was now in place, but refused to give any details.

The BMW liability arises because of the way it is dismantling the Rover group prior to the sale. The Cowley plant in Oxford, where BMW intends to manufacture the new Mini, and Land-Rover, which is being sold to Ford for £1.8bn, have been put into a new BMW subsidiary separate from Longbridge.

Under UK insolvency law these "hive-outs" create what is known as a related party contract. This means that if Longbridge closes at any time in the next two years, then the liquidators of the business would be entitled to seize both Land Rover and Cowley to help pay off creditors.

BMW has already made a £2bn provision in its accounts to pay for its withdrawal from Rover. But this only covers the write-down of fixed assets and stocks, redundancy payments and lease finance liabilities. The Land Rover and Cowley liabilities are separate.

Doubts are growing over whether the Phoenix consortium, led by the former Rover chief executive John Towers, can raise the necessary finance. BMW has given Phoenix until early next week to prove that the funds are available.

Mr Towers met the Secretary of State for Trade and Industry, Stephen Byers, yesterday morning to update him on the progress of the bid. Afterwards a DTI spokesman said Mr Byers had been briefed on the financial position but no formal request for government help had been made.

The DTI added that it would remain in close contact with the Phoenix consortium over the next few days.But the managing partner of Alchemy, Jon Moulton, said he believed the Phoenix consortium was on the point of collapse. "The Faulty Towers bid is about to fall over," he said.

Alchemy is understood to have maintained confidential contact with BMW since it dramatically pulled out of talks to buy Rover a week ago and is ready to resume negotiations at short notice. "Things could conceivably move quite quickly," Mr Moulton said.

Alchemy would rename Longbridge as MG Cars and cut production to around 60,000 cars a year - less than half current output. This would mean 3,000 to 4,000 redundancies compared to the 1,500 envisaged by Phoenix, which has pledged to maintain volume production of up to 250,000 cars. But Mr Moulton said: "The Alchemy deal will deliver some jobs, which is better than no jobs."

In addition to the cost of maintaining volume car production and providing dealer finance, Phoenix would also have to assume some £250m of liabilities relating to buyback guarantees on Rover cars sold through lease finance deals.

John Redwood, the former Conservative trade and industry spokesman, said it seemed that Downing Street was trying to bring Alchemy back into the talks. "Stephen Byers should step aside and give Rover a chance," he added.