European Commission’s Investigation into ADNOC’s Acquisition of Covestro

The European Commission’s initiation of an in-depth investigation into the Abu Dhabi National Oil Company’s (ADNOC) acquisition of German chemical giant Covestro marks a pivotal moment in the enforcement of the newly established Foreign Subsidies Regulation (FSR). This inquiry not only scrutinizes the specifics of one of the largest recent cross-border acquisitions in Europe, valued at €14.7 billion ($17.2 billion), but also signals a broader shift in how European competition authorities intend to monitor and regulate foreign investments backed by state subsidies. This analysis will explore the multifaceted dimensions of the probe, integrating key facts, financial metrics, and stakeholder perspectives to unpack the implications for the European internal market, foreign investment practices, and the future of industry mergers.

Background to the Acquisition and the Launch of the Investigation

By December 2024, ADNOC, together with its co-investor XRG, successfully secured 91.3% of Covestro’s shares. This exceedance of acceptance thresholds positioned ADNOC as the predominant shareholder of a conglomerate generating €14.2 billion in revenue as of 2024. Covestro, despite slight declines in revenue and earnings — revenues were down 1.4%, EBITDA down 0.8%, and the company posted a net loss of €266 million — remains a significant player in the European chemicals sector, with an EBITDA projection for 2025 between €1.0 and €1.6 billion.

Amid this backdrop, the European Commission’s probe arises from preliminary concerns that ADNOC, benefiting from alleged UAE state subsidies, might have secured the deal under conditions not reflective of normal market competition. The Commission stresses the role of the recently applied Foreign Subsidies Regulation, designed to prevent foreign state support from distorting the EU’s internal market by conferring undue advantages in corporate acquisitions.

Investigative Focus: Competition and Market Distortion Concerns

At the core of the European Commission’s concerns is the potential distortion caused by subsidies that ADNOC may have received from the UAE government. The Commission stated, 

“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.” 

This suggests a suspicion that the state-backed financial support allowed ADNOC to offer conditions unmatchable by purely commercial competitors, effectively deterring rival bids.

The implications of such financial backing are twofold: it could lead to the suppression of genuine competitive bidding in mergers and acquisitions, as foreign state subsidies mask the true market-driven cost structures, and it may enable a foreign entity to implement non-commercialbusiness strategies post-acquisition, potentially foreclosing competition or distorting market structures. Given Covestro’s strategic significance in the European chemical industry, the Commission’s investigation probes whether the merged entity could leverage these advantages unevenly within the internal market.

Financial and Market Impact Perspectives: Covestro’s Performance and Outlook

Despite a challenging 2024, Covestro has reaffirmed its strategic direction. The 2024 results reported a slight decline with revenues of €14.2 billion, EBITDA of €1.1 billion, and a net loss of €266 million; however, the outlook for 2025 shows optimism, with EBITDA projected as high as €1.6 billion and positive operating cash flow expected. Nonetheless, the Q2 2025 sales report indicated an 8.4% drop, a setback relative to market estimates.

After the Commission’s announcement of the probe, Covestro’s share price demonstrated modest resilience, buoyed by confidence statements from company leadership. CEO Markus Steilemann emphasized the benefits of ADNOC’s investment in advancing Covestro’s “Sustainable Future” strategy, stating, 

“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 reflects management’s view that despite ongoing regulatory scrutiny, the ADNOC partnership is expected to catalyze growth and sustainability objectives critical to the firm’s long-term competitiveness.

Stakeholder Perspectives: Alignments and Contentions

The European Commission’s stance underscores a commitment to rigorous oversight of foreign acquisitions that could disrupt market equilibrium. Their focus on enforcing the Foreign Subsidies Regulation is designed to create a level playing field in the EU’s Single Market by neutralizing the potential for state-backed bidders to circumvent market discipline.

Conversely, ADNOC maintains an optimistic outlook, emphasizing the benefits its acquisition could bring. In its official response, ADNOC confidently noted, 

“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.” 

ADNOC’s position highlights not only faith in the regulatory process but also its intention to align with broader European industrial and economic interests through this acquisition.

Covestro itself has strongly signaled cooperation with the Commission’s review process and reaffirmed confidence in closing the deal. The company stated, 

“We are working cooperatively with the Commission towards a conclusion of the authority’s FSR review” and remain “very confident” of completing the transaction by the end of the year.” 

This collaborative approach suggests that Covestro views the acquisition as strategically beneficial despite regulatory hurdles.

Broader Context: The Significance of the Foreign Subsidies Regulation

This investigation serves as a crucial litmus test for the efficacy of the EU’s Foreign Subsidies Regulation, a framework introduced to close a regulatory gap related to foreign state aid in mergers and acquisitions. The FSR imposes transparency and competitive fairness requirements on acquisitions exceeding certain thresholds—Covestro qualified due to its over €500 million annual EU turnover and reported foreign subsidies exceeding €50 million over three years.

The significance lies in the fact that prior to the FSR, foreign government-backed transactions did not face EU-level subsidy scrutiny comparable to that applied domestically or within EU member states. The introduction of this regulation reflects growing political and economic sensitivities around foreign direct investments, particularly from non-EU state-owned enterprises.

As such, the Commission’s investigation will set precedent on how diligently foreign state subsidies are scrutinized and whether transactions involving entities like ADNOC will face binding remedies or even prohibition if the market distortion risk is deemed too high. The decision, expected by December 2, 2025, could reverberate across Europe’s M&A landscape—altering investment flows, acquisition strategies, and regulatory compliance dynamics.

Potential Implications for the European Chemical Industry and Beyond

The outcome of this investigation could reshape competitive dynamics within the European chemical sector. Covestro is a critical player in sustainable materials and chemical production, and changes in ownership influence not only corporate strategy but also supply chain configurations, innovation agendas, and market access structures. If the acquisition is approved with conditions or blocked, it might influence how future transactions are approached by bidders reliant on state support.

Moreover, the probe signals to foreign investors, especially from Gulf states, that investments in Europe will undergo detailed evaluation grounded in competition fairness and transparency. As stated by the European Commission’s concerns, the aim is not to discourage investment but to ensure it occurs on a level playing field without distortion caused by subsidies that confer artificial competitive advantages.

Balancing Open Markets with Fair Competition

The European Commission’s investigation into ADNOC’s acquisition of Covestro encapsulates a moment where market oversight, national security, and economic openness converge. It underscores the complexity of managing global investment flows in a manner that preserves competition and market integrity without unduly hampering foreign capital inflows that could drive growth and innovation.

With the Commission highlighting suspicions of “exceptionally high price and other advantageous terms” possibly enabled by foreign subsidies, and ADNOC asserting a track record of mutually beneficial partnerships, the investigation will likely scrutinize the intersection of financial leverage, non-commercial state backing, and competitive dynamics. Covestro’s cooperative stance and confidence in closing the deal suggests a shared belief in the transaction’s intrinsic value beyond regulatory hurdles.

Ultimately, the outcome of this probe will offer important lessons for the enforcement of the EU’s Foreign Subsidies Regulation and set the tone for how Europe balances foreign investment opportunities with the imperative to guard its internal market competition from distortions caused by state-backed foreign enterprises. This investigation thus represents both a specific case study for industry observers and a landmark moment in external trade and investment governance.