Exclusive: ADNOC close to finalising EU remedies for Covestro deal, sources say

Abu Dhabi's ADNOC is preparing significant remedies for its 14.7 billion euro bid for Germany's Covestro to address an ongoing EU subsidy investigation under the Foreign Subsidies Regulation. The proposed measures include converting a 1.2 billion euro capital increase into a shareholder loan at market rates, addressing concerns regarding unlimited state guarantees similarly to a prior UAE telecom deal, and committing to keep Covestro's technology and intellectual property within Europe. This development is crucial for ADNOC's largest acquisition to date and represents a key test for the EU's new FSR framework targeting unfair foreign aid.

Analysis

Abu Dhabi's state oil company, ADNOC, is proactively addressing significant regulatory headwinds from the European Commission concerning its 14.7 billion euro bid for Germany's Covestro. The core of the issue stems from an EU investigation under the new Foreign Subsidies Regulation (FSR), which scrutinizes potential unfair advantages enjoyed by ADNOC, specifically an alleged unlimited state guarantee and a proposed 1.2 billion euro capital increase. In response, ADNOC is reportedly preparing to convert the capital injection into a market-rate shareholder loan, a remedy aimed at commercializing the transaction and negating subsidy claims. Furthermore, ADNOC plans to neutralize concerns over its state guarantee by adopting a framework similar to that used by UAE telecoms group e&, which successfully secured EU approval by aligning its articles of association with ordinary bankruptcy law. This is a critical test case for the FSR, and ADNOC's additional pledge to retain Covestro's technology and intellectual property in Europe signals a significant concession to address broader European strategic sensitivities. While recent friction between ADNOC and EU regulators highlighted deal risk, these proposed remedies indicate a constructive shift intended to pave the way for approval.

Key Decisions for Investors

• Investors in Covestro (1COVG.DE) should view these proposed remedies as a positive development that increases the probability of the deal's success, potentially narrowing the M&A arbitrage spread, though regulatory risk remains until the European Commission formally accepts the concessions.
• The ongoing scrutiny of the ADNOC-Covestro deal exemplifies the heightened execution risk for acquisitions in the EU by state-affiliated entities under the new Foreign Subsidies Regulation, a factor that must be rigorously assessed in future cross-border M&A strategies.
• The key catalyst to monitor is the European Commission's official response to these remedies, as ADNOC's willingness to follow the precedent set by the e& telecom deal provides a tangible, and previously successful, path to regulatory approval.