First M&A clearances under EU foreign subsidies regulation

Telecommunications provider Emirates Telecommunications Group Company PJSC (e&) has obtained conditional approval, following in-depth M&A review under the FSR, for its acquisition of sole control of PPF Telecom group (PPF), excluding PPF’s Czech operations.  e& is based in the United Arab Emirates (UAE) and controlled by a sovereign wealth fund controlled by the UAE, the Emirates Investment Authority (EIA). PPF is a prominent player in the European telecommunications market, with the acquisition aimed at strengthening e&’s presence in Europe.

The conditional approval marks the first time the Commission has approved a transaction under the FSR’s mandatory and suspensory mergers and acquisitions (M&A) notification regime, applicable since October 2023, following an in-depth phase two review.

The FSR, which first began to apply in stages from July 2023, empowers the Commission to investigate and address distortions caused by foreign subsidies in the EU internal market. This regulation is part of the EU’s broader strategy to ensure a level playing field for all companies operating within its borders, regardless of their origin. The FSR allows the Commission to scrutinise M&A transactions involving foreign financial contributions (FFCs) where specific mandatory notification thresholds are triggered, to determine whether those FFCs constitute distortive foreign subsides and, if so, to impose conditions or remedies to mitigate any potential negative impact on competition in the EU.

Tadeusz Gielas, competition law expert at Pinsent Masons, said: “Almost a year after the FSR mandatory notification regime began to apply, we are now seeing outcomes from the Commission’s scrutiny of M&A deals that involve financial contributions attributable to non-EU countries.”

As part of its in-depth investigation into the transaction, the Commission gathered information on both PPF and e&, as well as feedback from competitors in the EU internal market. The Commission’s investigation did not identify actual or potential negative effects on competition in the acquiring process as e& was the sole bidder with sufficient own resources to perform the acquisition. It concluded that foreign subsidies did not alter the outcome of the acquisition process.

However, the Commission did identify some concerns. This included the fact that e& and EIA received foreign subsidies from the UAE, consisting notably of an unlimited state guarantee to e&, as well as grants, loans, and other debt instruments to EIA. The Commission found that the foreign subsides received by both e& and EIA posed a risk to competition in the EU internal market post-transaction.

Unlimited state guarantees are considered “most likely to distort the internal market” under the FSR. The Commission noted that the foreign subsidies benefited e& and EIA and would have artificially improved the capacity of the merged entity to finance its activities within the EU internal market. The Commission said that, in those circumstances, the merged entity could distort the level playing field in the EU relative to other market players by expanding activities beyond what an equivalent firm, without the subsidies, could do.

e& and EIA offered a commitments package to address these concerns, including a commitment that e&’s articles of association do not deviate from ordinary UAE bankruptcy law. This commitment works to remove the unlimited state guarantee and associated competition risks. The package also includes a prohibition of any financing from the EIA and e& to PPF’s activities in the EU internal market. This is subject to certain exemptions concerning non-EU activities and “emergency funding”, which will be subject to Commission review. e& also committed to informing the Commission of future acquisitions that do not trigger notification requirements under the FSR. 

The Commission completed its phase two review ahead of its legal deadline on 15 October and was prepared to accept purely behavioural commitments to assuage its competition concerns.

“Whilst this phase two review and approval shows how smoothly the new M&A screening process under the FSR can run, it is notable that the UAE-backed acquirer was prepared to offer suitable remedies early in the process and the FFCs did not distort competition in the acquisition process because e& was the only bidder for PPF. Time will tell how the Commission will approach other M&A notifications under the FSR. For example, in cases where the acquirer is more reluctant to offer remedies, if there are several competing acquirers, if the FFCs come from a non-EU jurisdiction that generally attracts closer EU scrutiny, or where the deal involves a more sensitive industry sector,” said Gielas.

Separately, the Commission has also cleared another M&A transaction - Swisscom’s acquisition of Vodafone Italia - under the FSR following a phase one review. The transaction is still subject to phase two merger review under Italy’s national merger control rules.

Gielas noted that “the FSR obliges the Commission to publish its phase two decisions, but not phase one decisions, under the FSR M&A screening rules, which reduces transparency of the Commission’s M&A work under the FSR.  For example, the Swisscom FSR clearance was announced by the acquiring company itself” said Gielas.

“Additionally, the Commission has, to date, only published high level merger review figures and is yet to publish detailed formal FSR guidance; although it has been taking incremental steps in that direction and, in July, it published a working paper (8-page / 295KB PDF) on certain key concepts and emerging Commission practice under the FSR” said Gielas.

Dr Totis Kotsonis, also a competition law expert at Pinsent Masons said: “Nearly a year since the FSR came fully into effect, it is instructive to note that only one M&A deal reached phase two and that the Commission’s concerns were addressed adequately by means of commitments, leading to a relatively swift approval decision. Although it is still too early to draw any definitive conclusions, this might suggest that the question of foreign subsidies will ultimately prove comparatively of lesser concern in the context of M&A transactions”.

“This contrasts with the position in relation to public procurements, where we have already had three phase two investigations on the basis of concerns over foreign subsidies to the winning supplier, as well as an ex officio investigation concerning suppliers of wind turbines in the context of the development of wind parks in a number of member states. Back in April, we also had the first dawn raid under the FSR which, again, although not directly related to an ongoing procurement, did relate to a supplier that would have participated in EU regulated contract award procedures.”

“That foreign subsidy concerns in relation to public procurements might be greater than in relation to M&A transactions is arguably not surprising. There are already other tools in place, such as merger notification procedures and foreign direct investment screening laws, that can lead to scrutiny and blocking of M&A transactions on competition or security grounds. On the other hand, current EU procurement legislation does not cater adequately, if at all, for either of these two possibilities, rendering FSR a comparatively more important screening tool in a public procurement context,” said Kotsonis.

Arkadius Strohoff, a Pinsent Masons competition law expert based in Germany, said that both the e&/PPF and Swisscom/Vodafone Italia clearances under the FSR “set an important precedent and give parties to M&A transactions valuable insights into the Commission’s current approach to applying the FSR”.

“The decisions underline the importance for investors to carefully assess any proposed transaction that requires notification. This assessment allows investors to identify potential issues early and devise solutions to help ensure a streamlined notification process with the Commission. The FSR procedure in the e&/PPF case serves as an excellent example, where conditional approval was given three weeks before the standard phase two review deadline,” he said.