ADNOC’s Covestro Deal Tests Europe’s Stance on State-Backed Foreign Acquisitions

The European Commission’s announcement of an in-depth investigation of Abu Dhabi National Oil Company’s (ADNOC) acquisition of German chemical producer Covestro represents a landmark case in the enforcement of the EU’s Foreign Subsidies Regulation (FSR). This investigation shines a spotlight on how foreign subsidies, especially from state-owned enterprises outside the European Union, can potentially distort competition within the internal market. At stake are issues of fair market access, the integrity of competitive processes in mergers and acquisitions, and the broader regulatory landscape concerning foreign direct investment in strategic industries in Europe.

Background and Scope of the Acquisition

ADNOC, a state-owned oil and gas company headquartered in the United Arab Emirates, undertook a major acquisition of Covestro, a leading manufacturer specializing in high-performance polymers and chemical products based in Germany. The deal, valued at approximately €14.7 billion ($17.2 billion), culminated in ADNOC and its co-investor XRG securing 91.3% ownership of Covestro by December 2024. This substantial acquisition followed a public bid announced in October 2024, placing ADNOC as the controlling shareholder of a company with significant revenues—€14.2 billion reported in 2024—despite modest declines in earnings and a net loss (-€266 million) recorded that year.

The acquisition attracted scrutiny due to Covestro’s turnover exceeding €500 million in the EU and the report of foreign subsidies amounting to over €50 million within the past three years, thus triggering notification requirements under the EU’s FSR. The Commission’s decision to open an in-depth probe, expected to conclude by December 2, 2025, is an early application of these new rules aimed at addressing potential distortions caused by foreign state support.

Concerns Over Foreign Subsidies and Market Distortion

Central to the Commission’s investigation are preliminary concerns that the UAE government might have provided ADNOC with subsidies that influenced the acquisition’s terms and conditions. These reportedly include an unlimited financial guarantee from the UAE and a committed capital increase into Covestro by ADNOC, which the Commission suspects may have facilitated a purchase price and deal structuring “that would not be in line with market conditions” and that could not have been matched by unsubsidized competitors.

The Commission expressed these concerns explicitly: 

“ADNOC may have proposed an exceptionally high price and other advantageous terms, which might have discouraged other bidders from presenting offers... The Commission has preliminary concerns that the foreign subsidies may have enabled ADNOC to acquire Covestro at a valuation and financial terms that would not be in line with market conditions,” 

emphasizing the risk that such government-backed advantages distort the competitive bidding process.

Such distortion could manifest in two critical ways. First, it may have deterred other potential bidders from making offers, undermining the fairness of the acquisition process itself. Second, post-acquisition, the foreign subsidies could enable ADNOC to adopt investment and business strategies motivated by non-commercial considerations, potentially hampering competition within the EU’s internal market. This dual concern mirrors the EU’s policy objective under the FSR to maintain a level playing field, preventing foreign subsidies from distorting market dynamics or crowding out private investment.

Financial Performance and Market Impact of Covestro

Despite Covestro’s slight revenue decline of 1.4% in 2024 alongside an EBITDA decrease of 0.8%, the company retains a notable market presence with revenues surpassing €14 billion. The net loss of €266 million in 2024 reflects operational challenges, but the outlook for 2025 carries cautious optimism, with expected EBITDA ranging from €1.0 to €1.6 billion and operating cash flow potentially reaching up to €300 million.

Covestro’s second-quarter 2025 sales, however, declined by 8.4%, missing market estimates, indicating ongoing market pressures. The company’s share price, nevertheless, showed modest resilience after reaffirming confidence in the completion of the ADNOC deal despite the EU’s investigation.

Reflecting this strategic optimism, CEO Markus Steilemann stated, 

“The strategic partnership with ADNOC is exactly the right step for Covestro at the right time... we will be able to execute on our ‘Sustainable Future’ strategy even more consistently.” 

This underscores management’s belief that ADNOC’s backing can advance Covestro’s sustainability commitments and growth aspirations, despite regulatory uncertainties.

Stakeholder Perspectives and Positions

The European Commission positions itself as a guardian of the EU internal market’s competitiveness and integrity, applying the FSR to ensure foreign state subsidies do not confer artificial advantages that distort competition. The Commission’s investigation aims not only to examine the acquisition process's fairness but also to assess whether post-merger behaviors enabled by subsidies could harm competitive conditions.

ADNOC, maintaining a confident stance, expressed the expectation that thorough review of all facts will vindicate the transaction. As ADNOC emphasized, 

“We are confident that when all facts are thoroughly reviewed, there will be no justification to delay approval of a transaction that will provide significant benefits for all stakeholders and invigorate European industry... ADNOC has a proven track record in value creation and driving opportunities for growth built on long-term and mutually beneficial partnerships.” 

This statement highlights ADNOC’s intention to align its investment with EU industrial goals and its confidence in navigating regulatory scrutiny.

Covestro echoes this cooperative attitude toward the Commission’s process, affirming collaboration and confidence in deal closure within the calendar year. As stated by the company, 

“We are working cooperatively with the Commission towards a conclusion of the authority’s FSR review” 

and the deal remains on track despite the ongoing investigation.

Significance of the Foreign Subsidies Regulation and the Probe’s Precedent

Introduced in 2023, the Foreign Subsidies Regulation fills a regulatory gap regarding foreign government subsidies in non-EU state-backed mergers and acquisitions. Prior to the FSR, foreign subsidies were not scrutinized at the EU level with the same rigor as domestic or intra-EU state aid, allowing certain acquisitions by foreign state-owned enterprises to potentially distort the market unnoticed.

The ADNOC-Covestro case stands as one of the first major tests of this new framework. The Commission now has 90 working days from the opening of the in-depth probe to determine whether the acquisition should proceed, be approved subject to commitments, or be prohibited due to its anti-competitive effects. The outcome will set important precedent for how strongly the EU enforces its rules against foreign subsidies, particularly from major non-EU states such as the UAE.

In regulating these transactions, the EU faces a balancing act between welcoming foreign investment, which can spur growth and innovation, and protecting market integrity and competition. If strict measures are applied, it may deter future state-backed investments from non-EU countries, particularly from strategically important regions like the Gulf, which have been expanding their global investment footprints.

Implications for the European Chemical Industry and Investment Landscape

Covestro is a cornerstone of Europe’s chemical industry with significant involvement in innovative and sustainable materials. Ownership changes involving state-backed foreign entities carry potential ramifications for supply chains, research and development priorities, and market competition.

An approval with conditions or outright prohibition could redefine the strategic parameters for 12investment in European industrial champions. It may also influence how state-owned enterprises globally strategize their acquisitions, factoring the EU’s growing assertiveness in curbing subsidies that distort competition.

Furthermore, the case sends a clear signal to investors, especially foreign sovereign-backed firms, that their transactions will undergo heightened scrutiny to ensure compliance with EU competition and subsidy regulations. This could influence investor sentiment and deal-making strategies in the European market going forward.

Navigating Competition, Investment, and Market Integrity

The European Commission’s probe into ADNOC’s acquisition of Covestro encapsulates the complex contemporary dynamics of globalization, state capitalism, and regulatory oversight in the EU. By highlighting “exceptionally high price and other advantageous terms” linked to foreign subsidies, the Commission underscores its resolve to uphold market fairness and competitive neutrality.

At the same time, ADNOC’s confidence and Covestro’s strategic optimism indicate belief in the fundamental benefits of the transaction for European industry and sustainability goals. The investigation thus represents a crucial test case for the EU’s Foreign Subsidies Regulation, illustrating the tension between openness to foreign capital and protection against market distortion.

The Commission’s final decision by December 2, 2025, will have lasting implications—shaping how foreign investments in strategic sectors are evaluated and approved in Europe and potentially redefining the rules for global mergers and acquisitions involving state aid and subsidies. This case will be closely watched as a precedent for managing the interplay between foreign direct investment, state support, and competitive markets within the EU.