Update on the EU Foreign Subsidies Regulation: Conditional approval in first-ever in-depth review (“phase 2”) for an M&A transaction

On Tuesday, 24 September 2024, the European Commission granted conditional approval for Emirates Telecommunications Group Company PJSC (“e&”) to acquire sole control of PPF Telecom Group B.V. (“PPF”, excluding its Czech business) under the EU Foreign Subsidies Regulation (“FSR”). This approval is conditional on full adherence to the commitments offered by the parties.

The background: (Partial) acquisition of a European telecommunications provider by a state-controlled UAE company

The purchaser, e&, is a state-controlled telecommunications provider from the United Arab Emirates (“UAE”) offering mobile telephony services, controlled by a sovereign wealth fund, the Emirates Investment Authority (“EIA”) which is controlled by the UAE. PPF is a European telecommunications provider, based in the Netherlands, operating in the Czech Republic, Bulgaria, Hungary, Serbia and Slovakia. PPF’s operations include providing telecoms services and operating the underlying infrastructure. PPF has over 10 million customers in the telecoms sector.

The M&A transaction was notified to the European Commission on 26 April 2024. The European Commission then started its preliminary investigation (“phase 1 investigation”) as part of the M&A notification procedure.

During the phase 1 investigation, concerns arose due to sufficient evidence of foreign (i.e. non-EU) subsidies that could distort the EU market (see our overview of 11 June 2024). The foreign subsidies in question appear to consist notably of (i) an unlimited guarantee from the UAE and (ii) a loan for the benefit of the purchaser directly facilitating the transaction from banks controlled by the UAE. The European Commission was therefore concerned that, firstly, such subsidies would have improved e&’s capacity to carry out the acquisition. Secondly, as a result of subsidies, the merged entity could have benefited from an improved competitive position in the EU market post-transaction, in particular through preferential conditions for financing its activities in the EU.

In light of these concerns, the European Commission launched its first-ever in-depth investigation (“phase 2 investigation”) concerning an M&A transaction on 10 June 2024. The European Commission concluded its phase 2 investigation by granting conditional approval for the transaction subject to compliance with the commitments.

In the press release (the decision is not yet publicly available), the European Commission stated the following results of its phase 2 investigation:

• The phase 2 investigation revealed that e& and the EIA indeed received foreign subsidies from the UAE, such as an unlimited State guarantee for e& – which is a foreign subsidy most likely to distort the EU market according to the FSR – and other financial aid like grants and loans received by EIA.
• These foreign subsidies did not, even potentially, influence competition during the acquisition process. Not only was e& the only bidder, but it also possessed sufficient resources to acquire PPF so that the foreign subsidies did not influence the acquisition process.
• However, concerns were raised about potential competition distortions in the EU market due to the foreign subsidies received by e& and the EIA post-transaction.

Specifically, the unlimited State guarantee could have provided an advantage to the combined entity, allowing it to finance its investment and business activities more easily and take higher risks compared to its competitors in the EU market.

Commitments offered by e& and EIA

To mitigate these addressed concerns, e& and EIA proposed several commitments:

• A commitment that e&’s articles of association will not differ from ordinary UAE bankruptcy law, thus removing the unlimited State guarantee.
• A prohibition of any financing by EIA and e& of PPF’s activities in the EU market, except in specific cases such as non-EU activities and “emergency funding” which would be subject to the European Commission’s review. Additionally, it is required that other transactions between those companies shall take place on market terms.
• An obligation that e& shall inform the European Commission about future acquisitions that are not subject to the requirement to notify under the FSR.

The European Commission accepted the commitments offered by e& and EIA and conditionally approved the transaction. These commitments aim to remedy the competition distortions in the EU market the European Commission had identified. According to the European Commission, the commitments will (i) remove the unlimited State guarantee, (ii) prevent e& and the EIA from passing on foreign subsidies to the merged entity, and (iii) enable the European Commission to monitor particular areas of risk appropriately. An independent trustee will monitor the commitment’s implementation under the supervision of the Commission. The commitments are valid for 10 years, with a possible extension of an additional 5 years or further if agreed upon by the European Commission and e&.

Outlook

The adoption of the European Commission’s first M&A decision concluding a phase 2 investigation under the EU Foreign Subsidies Regulation marks a significant milestone.

It sets an important precedent for future cases and provides helpful guidance for future notifications under the FSR. Until now, market participants have had little practical knowledge of the decision-making practice of the European Commission given the absence of final decisions.

Further, the accelerated proceeding (with the decision being adopted almost two and half months ahead of the applicable legal deadline), demonstrates that an in-depth investigation can be completed within a reasonable timeframe when the parties cooperate effectively with the European Commission.

Finally, it also highlights how important it is for companies to thoroughly assess any planned transaction that requires notification under the FSR. This approach allows companies to identify potential complications early on and develop remedies to ensure a smooth notification procedure with the European Commission.

If you have any further questions about the FSR, our Noerr competence team of experienced experts in the field of FSR, EU State aid law and merger control will be happy to assist you. You can also register here to receive all our news alerts about the FSR.