ADNOC is likely to turn the Covestro capital infusion into a shareholder loan at established market rates.
Abu Dhabi National Oil Company (ADNOC) is seeking ways to address a European Union investigation into its €14.7 billion ($17.2 billion) attempt to acquire Covestro, a German company. This may include turning a planned €1.2 billion capital increase into a shareholder loan, according to sources familiar with the situation.
This deal is ADNOC’s largest purchase so far and stands out as a major foreign takeover of a European Union company by a Gulf nation. The European Commission, serving as the EU’s competition authority, has expressed concerns that ADNOC could benefit from state subsidies, such as an unlimited guarantee, and that foreign aid may play a role in the capital increase for Covestro.
The EU antitrust authorities launched an investigation on Monday to assess potential market distortions resulting from foreign subsidies.
Since May, the European Commission has been reviewing the deal under its foreign subsidies regulations, and on Monday, it started a comprehensive investigation, warning that the United Arab Emirates’ subsidies would hinder the EU’s internal market.
According to people familiar with the situation, ADNOC is likely to turn the Covestro capital infusion into a shareholder loan at established market rates.
The company is trying to address EU concerns about unlimited state guarantees in a manner similar to how the UAE telecom group e& did last year, getting EU approval for portions of the Czech telecoms company PPF.
e& had agreed to remove its unlimited state guarantee by ensuring that its articles of association comply with standard UAE bankruptcy law. The bankruptcy law offers several options for businesses facing financial difficulties. The law encouraged companies to find solutions, such as court-supervised settlements with creditors, allowing businesses to continue operating while restructuring their debts, rather than pushing them into liquidation.
The European Commission announced on Tuesday that it is approving the UAE telecom group e&’s acquisition of parts of the Czech telecom company PPF, subject to specific conditions. It was after its initial investigation under the new EU regulation aimed at stopping unfair international competition.
As part of the deal, e& will gain complete control of PPF Telecom, with the exception of its local operations in the Czech Republic. The remedies, offered by e&, include erasing an unlimited state guarantee and a ban on funding from EIA and e& for PPF’s EU-related operations. It will be overseen by an independent trustee.
ADNOC is also expected to commit to retaining Covestro’s technology and intellectual property within Europe, according to the sources.
The Commission, which is reviewing the deal under its Foreign Subsidies Regulation (FSR), designed to address unfair foreign aid for enterprises, declined to provide comments.
A representative for XRG, ADNOC’s international investment division, mentioned that they do not discuss ongoing negotiations.
ADNOC’s Chief Executive, Sultan Ahmed Al Jaber, reportedly had a conversation with EU antitrust leader Teresa Ribera on Friday, according to sources.
Last week, ADNOC criticized EU regulators for asking excessive and intrusive requests for information, warning that such regulatory demands could threaten the acquisition.
They gave the criticism after the European Commission announced on Wednesday that it had temporarily suspended its investigation, awaiting additional information from ADNOC. The Commission will establish a new timeline for its decision after the investigation restarts. The former deadline was December 2.
The outcome of ADNOC’s bid for Covestro now depends on the company’s ability to address the EU’s regulatory concerns. As the investigation resumes, the deal will serve as a significant test of the EU’s new foreign subsidy rules and the willingness of Gulf investors to adapt to European standards.