European Alchemy Tries Its Hand at BMW’s Rover Group –

The announcement that BMW is poised to sell parts of its foundering Rover Group car unit to U.K. private equity group Alchemy Partners is causing some controversy in the European private equity world and in the U.K. political arena.

Should the deal close, Alchemy will take over a plant in Longbridge that produces Rovers, MGs, MGF sports cars and the famed Minis. Longbridge passes to Alchemy on a debt-free basis. BMW has written off GBP1.9 billion and is throwing in vehicles in stock worth as much as GBP500 million. Alchemy, meanwhile, is apparently investing no more than GBP50 million.

That BMW should want out is not surprising, given Rover’s dismal recent performance: the German carmaker has sunk some GBP2.8 billion into Rover and was faced with the prospect of investing at least as much again to transform it into a viable proposition. Rover’s losses last year have been estimated at anything between GBP700 million and GBP730 million.

Many private equity insiders question why Alchemy should want in. Rover, despite its proud history, has dwindled in recent years to an increasingly lacklustre brand, and the Longbridge plant is currently producing 50% more cars annually than it sells. But Alchemy, led by Jon Moulton, is known for its turnaround investing. The firm will seek to find new life in Rover by concentrating on reinvigorating the MG marquee, a specialist niche.

In a parallel deal that appears to have dictated the timing of the Rover deal, Land Rover has been bought by Ford for GBP1.8 billion.

The predictable political storm in the U.K. was provoked primarily because of the scale of job losses feared: industry observers expect that as many as 8,000 of the 9,000 jobs at the Longbridge manufacturing plant will ultimately disappear. However, the prime ministerial chagrin was undoubtedly heightened by the fact that BMW and Alchemy had had the temerity to hatch a deal behind the government’s back. Here, it must be remembered that Tony Blair was happy to dismiss Vodaphone’s takeover of Mannesman as a purely commercial issue.

Although the Prime Minister asserted that the government would do anything in its power to encourage alternative bids for Rover, no credible proposal has yet emerged and, at press time, Alchemy’s plan is looking increasingly like a done deal.

The multi-billion pound question remaining is, can even Alchemy build MG into a profitable and sellable proposition within anything resembling a normal private equity holding period against the background of a motor industry that is embracing global consolidation?

The deal has generated a great deal of negative comment, with private equity houses in general and Moulton in particular widely portrayed as asset strippers. Meanwhile, it appears that the U.K. government’s willingness to cuddle up to the venture capital industry stops short at the boundaries of early-stage, high-tech glamour. If Rover’s MG does flourish, it will represent not only an industrial and commercial triumph for Alchemy but also a considerable public relations coup for the private equity industry.