Alchemy thought the deal was done. Then BMW faxed 'impossible' conditions, and it was all off

Jon Moulton, Alchemy's senior partner, realised the Rover deal was dead at 6pm on Thursday. He was at his desk at Alchemy's head office in Covent Garden, central London. He was preparing for a long night of talks, during which he expected to sign the deal to take control of Rover.

The rest of his negotiating team were at the City offices of Norton Rose, BMW's solicitor, with BMW's team. Then, as office workers streamed home across the capital, the fax came through from BMW's headquarters in Germany. Nobody at Alchemy had expected it.

The fax contained a long, detailed list of conditions that BMW would require Alchemy to accept before the sale could go ahead. The new financial clauses were so onerous that the prospective buyers knew straight away they could not agree to them. They included what appeared to be a £1bn indemnity clause. If accepted, the Alchemy team felt Rover would have been insolvent as soon as the deal was settled.

Mr Moulton knew the game was up. "It seems they just decided they didn't want to do the deal," he said yesterday.

The fax was all the more surprising given that BMW was apparently "hot to complete the deal" on Thursday morning. According to some sources the German car maker was ready to seal it and prepared to make financial sacrifices to do so.

But BMW called a lunchtime board meeting and then came the change of heart. Perhaps, some say, BMW feels it can close down Rover more cheaply than it can sell it.

Mr Moulton maintains that Alchemy could still be interested in acquiring Rover if BMW modifies its terms, but he does not expect this. "It's a shame. We put a lot of work into it," he said.

The collapse of the deal marks the end of six weeks of drama as the future of one of the most famous names in British manufacturing hung in the balance.

Alchemy started secretly planning to buy Rover last October. Mr Moulton visited BMW's headquarters in Germany and met Helmut Panke, the chief financial officer. Mr Moulton's pitch was brief and to the point. Alchemy would buy Rover and its troublesome Longbridge plant near Birmingham. To cover the losses, BMW could sell Land Rover. He knew his proposals were "ballsy" but as a career venture capitalist, he was confident he could make the figures stack up.

But Rover was in a dreadful mess, having lost £754m last year. The Longbridge plant was losing £2m a day. BMW wanted out, having spent six years and £4bn of investment trying to resuscitate what it came to refer to as "the English patient". During the next six months Mr Moulton made a dozen more trips to Munich, and in the first week of March, he was told BMW wanted the deal signed in principle that week.

On the evening of 14 March the news broke that BMW was considering breaking up Rover. Officials at the Department of Trade and Industry appeared to have been caught on the hop, and described the reports as "speculation". The following day the first reports appeared tipping Alchemy Partners as favourites to buy Rover. Things then moved rapidly. The next day the BMW board met in Munich and agreed to the break-up of Rover, selling Land Rover to Ford. The day after that the story was front-page news.

Mr Moulton unveiled his ambitious plans - which were to reinvent the struggling business as the MG Car Company, retreat from mass volume car production and develop a new range worthy of the MG name.

From the start there was a huge issue over potential job losses. The thorniest problem was the future of Longbridge, which employs 9,000 workers. Alchemy pledged to continue production of the Rover 25, 45, MGF and old Mini at Longbridge. BMW agreed to build the new Rover 75 under contract for Alchemy at Cowley, near Oxford. "The reality is that there are two choices, no jobs or some jobs. We prefer the latter," Mr Moulton said.

Union leaders, ministers and industry analysts queued up to lambast the proposals. How could a venture capitalist run a car company better than BMW? What about our jobs, asked the workers. Who are Alchemy anyway, many said.

As the saga unfolded the Government appeared to be continually wrong-footed. Two hours after Tony Blair's official spokesman, Alastair Campbell, had assured journalists no deal was imminent, BMW announced the ditching of Rover. Aides of Stephen Byers, the Secretary of State for Trade and Industry, said he had held meetings with a Rover executive and had not been told about the sell off. Joachim Milberg, the BMW chairman, had also been disingenuous, talking of restructuring the company while putting the final touches to selling it.

Mr Moulton remained philosophical. "I'm pretty thick-skinned," he said. As March progressed he would need that thick skin. He had a slanging match with Mr Byers. Rover workers dubbed him an "asset stripper". After a task force was set up to handle the job losses, talk surfaced of a boycott of BMW cars. Then an alternative buyer for Rover emerged.

The group was led by former Rover executive John Towers and backed by John Hemming, a West Midlands computer millionaire. It broke cover on 22 March, then concentrated on raising the required funding.

By the end of March, BMW's annual results showed yet further heavy loses at Rover. BMW then told a select committee of MPs that it had tried to sell the company to Ford, General Motors, Volkswagen and Toyota but failed in each case. In an interview with a German newspaper, Professor Milberg said Longbridge would have to be rebuilt from scratch.

April started with a huge march in Birmingham to support the Rover workers. Within days the Tower consortium provided further details of its plans. It promised to retain volume production and all but 1,500 of the Longbridge jobs. Mr Moulton was scornful. "It may amount to, 'Give us a car company and £2bn please, guv'," he said.

By 17 April, Alchemy announced further plans including building a family of MG sports cars but car experts were still unconvinced.

This week the denouement appeared to have arrived - and it was one nobody had predicted. On Thursday, BMW said the Towers consortium was "not financially backed", leaving the way clear for Alchemy. Or so it seemed.