EU BASIC INDUSTRIES: Covestro: EU Foreign Subsidies Regulation

(COVEGR; Baa2/NR/NR)

• The EU introduced EU Foreign Subsidies Regulation (2022/2560), effective from July 2023, to prevent unfair competition in the internal market arising from market participants receiving the benefit of state subsidies from foreign governmental owners.
• The most relevant case for the Covestro deal was e& (formerly Etisalat)’s takeover of certain assets from PPF Telecom in a €2.2bn deal.
• e& is controlled by the Emirates Investment Authority (UAE sovereign wealth fund).
• Just like with Covestro, the acquisition process itself is not in question as there is only one bidder.
• The issues arise for how the company will be able to have an unfair advantage in the single market.
• The e& acquisition was eventually passed subject to certain remediations which only last for 10 years – though can be extended for another 5.
• The EU’s remedies were as follows:
• A commitment that e&'s articles of association do not deviate from ordinary UAE bankruptcy law, thereby removing the unlimited State guarantee.
• A prohibition of any financing from the EIA and e& to PPF's activities in the EU internal market, subject to certain exceptions concerning non-EU activities and “emergency funding”, which will be subject to review by the Commission, as well as the requirement that other transactions between those companies take place at market terms.
• A requirement that e& inform the Commission of future acquisitions that are not notifiable concentrations under the FSR.
• Link:  { https://ec.europa.eu/commission/presscorner/detail/en/ip_24_4842}
• On 3rd Sep, the EU issued a “stop the clock” notice on the ADNOC/Covestro takeover pending the receipt of more information.
• The UAE’s responded that the EU had gone too far and may jeopardise the deal.
• In terms of competition, the telecom market tends to have 3-4 operators in each geography. The polymers market has many more players, so we would argue that market distortion is less likely. 
• In terms of a national security agenda, the e&PPF deal was agreed in Sep 24, it would be hard to argue that a lot has changed since then. The FT did note in July 24 that two Chinese firms pulled out of a Romanian solar plant, but the UAE already has a record of compliance with the EU.
• Is ADNOC losing interest? No.  In a Bloomberg interview from 1st October, an ADNOC spokesperson said that Covestro has over 8,000 patents and a global footprint. It is a key part of the long-term plans for ADNOC, and they have invested a lot of time on this deal since it was first mooted in 2023.
• The EU’s remediations in the PPF deal seem quite weak. Maybe they want something stronger but ultimately, we think that the takeover is still likely to happen.