M&A deal prompts foreign subsidies investigation in EU first

According to the Commission, there are sufficient indications that Emirates Telecommunications Group Company PJSC (e&) has benefitted from foreign subsidies in the form of “an unlimited guarantee” and “a loan from UAE-controlled banks” that directly facilitated the company’s acquisition of telecoms operator PPF Telecom Group B.V. (PPF), excluding PPF’s Czech business.

This is the first time that the Commission has opened an in-depth investigation relating to a merger or acquisition deal under the EU Foreign Subsidies Regulation (FSR).

The FSR, which came fully into effect on 12 October 2023, enables the Commission to investigate foreign subsidies that have been granted to businesses involved in certain M&A transactions or joint ventures, public procurement procedures and other market situations, if it suspects that these might have distorted competition in the EU.

“The Commission has concerns that such subsidies may have improved e&'s capacity to perform the acquisition as well as the competitive position of the merged entity in the EU going forward, notably by improving its capacity to finance its EU activities at preferential terms,” the Commission said in a statement.

Dr Totis Kotsonis, subsidy control and trade expert at Pinsent Masons, said: “Although each case can only be decided on its own merits, this first case might yet set the tone as to the types of remedies which the Commission would consider as adequate in addressing any distortions of competition concerns, assuming these are confirmed. As a reminder, the Commission could effectively block the transaction or allow it to proceed subject to certain behavioural undertakings.”

“When it comes to appropriate remedies, the Commission cannot take an approach which is disproportionate or inconsistent with what the Commission would have done in a state aid context.  Such an approach would be inconsistent with the requirements of the FSR itself.  It could also give rise to accusations that the Commission is treating third-country nationals less favourably than it does EU nationals in similar circumstances and undermine the Commission's argument that the FSR is merely seeking to level the playing field,” he said.

“At the same time, given the potentially highly distortive nature of the foreign subsidies involved in this case, the Commission might take the view that party commitments would not be sufficient to address its concerns and that more drastic remedies would be proportionate and justified in the circumstances”, he added.

Kotsonis said that when the Commission opened in-depth FSR investigations in relation to public procurements in Bulgaria and Romania earlier this year, the companies under investigation ultimately chose to abandon the procurement procedures voluntarily rather than engage with the in-depth investigations and wait for them to be concluded. 

“Whether this scenario might play out in this case might yet depend on the extent to which the parties involved in the transaction take the view that the Commission would be minded to block the transaction,” Kotsonis said.

Some M&A transactions, joint ventures, or public procurement procedures that meet certain value thresholds have to be notified to the Commission under the FSR. The Commission said e&’s acquisition of PPF was notified to it on 26 April 2024.

In its investigation, it said it will assess whether the subsidies “lead to actual or potential negative effects on the acquisition process” – and, in particular, if the support has “altered the outcome of that process by allowing e& to deter or outbid other parties interested in the acquisition and/or by allowing e& to perform the acquisition in the first place”. The Commission said it will also assess if the subsidies “lead to actual or potential negative effects in the internal market with respect to the merged entity's activities”.

Arkadius M. Strohoff, competition law expert at Pinsent Masons, said that "the European Commission is expanding its sectoral focus to include telecommunications, in addition to the infrastructure, energy and security technology sectors already under review” in its FSR enforcement efforts.

"Looking ahead, it is expected that future FSR reviews by the Commission will continue to prioritise sectors that are critical to EU strategic objectives and policies. This approach demonstrates the Commission's commitment to addressing market distortions and ensuring alignment with its policy objectives," said Strohoff.

The Commission has until 15 October 2024 to make a decision in the case.

The opening of the new investigation means the Commission has now used each of its new enforcement tools under the FSR: in-depth investigations under both the public procurement and M&A notification regimes; the opening of ‘ex officio’ investigations; and the use of its dawn raids powers. The latter – the Commission’s dawn raids – have led to a recent legal challenge before the EU General Court.