In a highly anticipated decision, the European Commission (Commission) granted, on September 24, conditional approval for Emirates Telecommunications Group Company PJSC to acquire sole control of PPF Telecom Group B.V., excluding its Czech operations. This approval was issued under Regulation (EU) No 2022/2560 of the European Parliament and of the Council on foreign subsidies distorting the internal market (FSR) with stringent commitments to ensure fair competition within the EU single market.
This marks the first formal decision made under this new legal instrument, which sits at the intersection of merger control and State aid law. The FSR, in effect as of July 12, 2023, empowers the Commission to address potential market distortions caused by foreign subsidies, and is considered to be a critical tool to ensure fair competition within the EU while maintaining an open stance toward trade and investment.
Background of the Transaction
Emirates Telecommunications Group Company PJSC (known as e&), is a leading telecommunications operator based in the United Arab Emirates (UAE), which is backed by the Emirates Investment Authority (EIA), a sovereign wealth fund. PPF Telecom Group B.V. (PPF) is a prominent telecom operator in Czechia, Bulgaria, Hungary, Serbia, and Slovakia, serving altogether over 10 million retail customers in Central and Eastern Europe.
In 2023, PPF had announced that the e& (formerly Etisalat) would pay €2.2 billion upfront to acquire a controlling stake in its telecommunications assets in Bulgaria, Hungary, Serbia, and Slovakia. Additionally, e& will make earn-out payments of up to €350 million within three years after closing if PPF Telecom exceeds certain financial targets, bringing the total potential purchase price to up to €2.5 billion.
Preliminary Concerns and In-Depth Review
The Commission's in-depth investigation was carried out in accordance with Article 10(3) FSR. The transaction was initially notified to the Commission under Article 21 of the FSR on April 26, and a phase II review commenced on June 10.
During its initial review, the Commission raised preliminary concerns about e& receiving foreign subsidies, within the meaning of Article 3 FSR, that could distort the EU internal market, within the meaning of Article 5 FSR. These subsidies included an unlimited guarantee from the UAE and a loan from UAE-controlled banks, potentially facilitating the transaction.
The Commission assessed whether such subsidies had negative effects on the acquisition process, such as deterring or outbidding other parties, and whether they allowed e& to complete the acquisition. Additionally, the Commission examined potential negative impacts on the internal market regarding the future activities of the merged entity.
Findings and Commitments to Mitigate Concerns
The Commission found that e& and EIA had indeed received foreign subsidies from the UAE, including an unlimited State guarantee and other financial instruments. However, it concluded that these subsidies did not negatively affect competition in the acquisition process itself, noting that e& was the sole bidder and had sufficient funds for the acquisition.
Nonetheless, the Commission expressed concerns that the foreign subsidies could distort future competition in the EU internal market. Specifically, the unlimited State guarantees were seen as likely to distort competition by artificially enhancing the merged entity's ability to finance its activities in the EU. The Commission found that this could lead to risk-indifferent investments, auctions, infrastructure deployment, or acquisitions that would disrupt the level playing field.
To address these concerns, the Commission accepted several commitments from e&. First, e&'s articles of association will be aligned with ordinary UAE bankruptcy law, thereby removing the unlimited State guarantee. In addition, the financing by EIA and e& of PPF's activities in the EU internal market will be prohibited, with certain exceptions for non-EU activities. Finally, e& will be required to inform the Commission of future M&A transactions, even if they are not notifiable concentrations under the FSR. These commitments – which will be in force for at least 10 years – were deemed sufficient to mitigate the Commission's concerns and led to the conditional clearance of the acquisition.
Significance of the Conditional Approval
The imposed conditions were seen as crucial for maintaining a level playing field in the EU market, as mandated by Article 7 of the FSR. By removing the unlimited State guarantee and restricting financing, the commitments are designed to address the potential distortions identified by the Commission, so as to ensure that foreign subsidies do not give the merged entity an unfair competitive advantage in the EU internal market.
This decision sets a significant precedent for future enforcement actions and demonstrates the Commission's determination to forcefully apply this new instrument. By addressing these distortions, the FSR aims to maintain fair competition while still being open to global trade and investment in the interconnected global economy.
Notification Requirements and Procedural Phases Under the FSR
Since October 12, 2023, companies engaged in M&A transactions are required to notify their contemplated deals to the Commission for review under the FSR. This procedure is in addition to other regulatory reviews such as merger control at the EU and national level and foreign direct investment screening at the national level.
The FSR filing is required when two specific cumulative thresholds are met:
- first, at least one of the merging entities, the acquired company, or the joint venture must be established in the EU and generate an EU turnover of at least €500 million;
- second, the parties must have received a combined aggregate of at least €50 million in foreign financial contributions from third countries within the three years preceding the concentration.
Upon making an FSR notification, the parties are subject to a standstill requirement, meaning the transaction cannot proceed to closing until the Commission has granted clearance.
The FSR allows the Commission to review concentrations in different phases: an initial preliminary review that lasts 25 working days, followed by an in-depth investigation (Phase II) that can extend up to 90 working days, with possible extensions. The outcomes of these reviews can vary: the Commission might prohibit the transaction, grant clearance, or approve the concentration with binding commitments.
The commitments imposed under the FSR must be proportionate and effectively remedy the distortions caused by the foreign subsidy in the internal market. Examples of such commitments include both structural remedies, like the divestment of certain assets or the reduction of market presence, and non-structural remedies, such as offering access to infrastructure or repaying the foreign subsidy. Additionally, changes to the governance structure of the involved parties may also be required.
Other Cases in the Pipeline
As of now, several other proceedings are underway under the FSR, which underscore the increasing relevance of the FSR and the Commission's active approach in tackling potential market distortions caused by foreign subsidies.
For example:
- International Paper has sought EU foreign-subsidy clearance to acquire British rival DS Smith, with the Commission setting a deadline of November 21 to decide on the FSR aspects of this transaction.
- Likewise, Clayton, Dubilier & Rice and Permira have sought clearance for its acquisition of French cybersecurity company Exclusive Networks, with a Commission decision expected to be adopted by November 19.
- In October 2024, French energy company EDF complained to the Commission about a Czech tender award of a nuclear project to South Korean rival Korea Hydro & Nuclear Power, invoking the FSR. Such third-party submissions are possible under Article 9 FSR and may lead to an ex officio investigation by the Commission without a financial contribution being notified by the benefitting companies in the first place. EDF alleged that Korea Hydro & Nuclear Power may have received foreign subsidies from the South Korean government, giving it an unfair advantage in the Czech tender.
In this context, there is significant risk of dawn raids under the FSR, in particular where the Commission is investigating a non-notified transaction under its ex officio tool. Under Article 14 FSR, the Commission has the same investigation powers as under Regulation 1/2003 for competition law infringements. This is the first time that dawn raids have been possible in the context of trade investigations.
Finally, the EU General Court's recent decision to grant interim relief to Nuctech, a Chinese security firm with European subsidiaries in Germany, the Netherlands, and Poland, sheds light on the geographic scope of these investigation powers. In April 2024, the company had been exposed to a dawn raid by the Commission to verify whether it had received any Chinese state subsidies. Nuctech claimed that information stored on Chinese servers should be excluded from disclosure by the Commission and applied for annulment to the General Court, together with a request for interim relief in view of immediate suspension of the decisions ordering the inspection. The Court, however, rejected this request in August 2024, affirming the Commission's authority to investigate and request information from any business operating within the EU to assess potential violations of EU law, regardless of their country of origin.
As always, preparation is key and parties to potential (i) mergers or (ii) significant public procurement exercises should consider and where appropriate seek advice on the potential application of the FSR and, critically, whether a proactive notification should be made.
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