MG Rover's future in doubt despite loan

MG Rover's rescue deal with the Chinese car maker SAIC is hanging in the balance, despite the Government's last-ditch offer of a £100m sweetener loan to the beleaguered British company.

MG Rover's rescue deal with the Chinese car maker SAIC is hanging in the balance, despite the Government's last-ditch offer of a £100m sweetener loan to the beleaguered British company.

SAIC is holding what could be decisive talks with UK government officials in China this weekend about its planned joint venture with the loss-making company and the terms of the loan.

One condition of the loan, which the Government disclosed on Friday, is that the state-owned Chinese company gives assurances that it will not pull out of the deal.

SAIC, which is growing increasingly concerned about MG Rover's financial position, is considering its next move.

The Independent on Sunday understands that the Government has offered to lend the money to keep MG Rover afloat until a deal is signed, but expects to be repaid within six months. SAIC wants more time to repay the money.

The exact terms of the loan have not yet been worked out.

But if the Government insists on early repayment, SAIC could walk away. Failure to do a deal with the Chinese would push MG Rover into administration, probably within weeks, with the loss of up to 6,500 jobs at its Longbridge plant.

This would be highly embarrassing to the Government, with a general election just weeks away. MG Rover denied that the deal, which could still be signed later this month, is in jeopardy. SAIC declined to comment.

Another condition of the government loan is that the four directors of Phoenix Venture Holdings, the company that owns MG Rover, contribute some of their own money. "The Phoenix Four" rescued MG Rover from closure in 2000 when they bought it from BMW for a nominal £10. But they have been criticised for setting up a £12.9m executive pension fund and for paying themselves large salaries, and have been accused of "asset stripping" the business.

MG Rover has been in negotiations with SAIC since last summer. It had said that it expected the agreement to be signed in January or February this year. But in the past week it is understood that the directors of Phoenix Venture Holdings made a series of financial disclosures that have left SAIC seriously concerned about the deal.

These disclosures involve the level of liabilities SAIC would take on if it set up the car-making joint venture. SAIC is understood to be dismayed that these disclosures were made at such a late stage. The disclosures could include how much money the Chinese would have to invest in MG Rover and the scale of the company's losses, as well as MG Rover's pension and redundancy liabilities.

A spokesman for MG Rover denied that the company was late to reveal the full scale of its problems to the Chinese.

The timing of MG Rover's potential demise could not have come at a worse time for the Government. Longbridge is in the Labour MP Richard Burden's Birmingham Northfield constituency. The Redditch constituency of Trade minister Jacqui Smith is nearby. Studies have shown that the collapse of MG Rover could affect 50,000 workers in the West Midlands. This helps to explain why Tony Blair, Gordon Brown and Patricia Hewitt, the Secretary of State for Trade and Industry, have pledged unprecedented support to the ailing company.

One senior Whitehall source said: "Part of the problem was that MG Rover only recently disclosed to the Chinese the full scale of the problems and liabilities at the company." MG Rover denies this.

Ministers are working on a plan B should MG Rover go into administration. With little prospect of finding another buyer and with EU rules preventing the Government artificially propping up the firm, DTI officials are figuring out how budgets could be diverted to help re-train those who would lose their jobs.