The Foreign Subsidies Regulation in action: learnings from the Commission's first phase two merger decision

On 4 April 2025, the European Commission finally published the non-confidential version of its decision under the Foreign Subsidies Regulation (FSR) in relation to Emirates Telecommunications Group’s (e&) acquisition of PPF Telecom Group (PPF). 

The decision is notable, not only as it is the first full decision the Commission has issued under the FSR, but also because it provides important guidance on the Commission’s approach to identifying foreign subsidies, assessing their potential for market distortion, and designing effective commitments. 

Background

e& is a telecommunications operator based in Abu Dhabi. It is majority-owned and controlled by the Emirates Investment Authority (EIA), a sovereign wealth fund that is wholly-owned and controlled by the Federal Government of the UAE (the Commission considered that e& and the EIA formed part of the same undertaking). The target was PPF, a telecommunications operator in Hungary, Bulgaria, Serbia and Slovakia (PPF’s Czech business was carved out of the transaction and remained with the seller).

Pursuant to a share sale and purchase agreement dated 1 August 2023, e& agreed to purchase 50% plus one share in PPF. A mandatory FSR filing was triggered as:

• the transaction would result in e& acquiring sole control of PPF;
• PPF’s EU turnover exceeded the thresholds of €500 million; and
• e& had received “foreign financial contributions” (FFCs) from third countries of more than €50m in the three years preceding the transaction.¹

Overall, the Commission’s review process lasted almost a year, comprising a six-month pre-notification phase followed by a six-month formal review, before conditional approval of the transaction in phase two in September 2024.

The Commission’s analysis

The Commission’s phase two review focused on the whether e&, as a state-controlled entity, had received foreign subsidies², and whether those subsidies could distort competition within the EU.

Identifying foreign subsidies

With respect to the first question, the Commission examined: (i) the financing of the transaction; (ii) the apparent exemption of e& from ordinary UAE bankruptcy law; and (iii) various loans and grants provided by the UAE state to EIA. Of most interest are the Commission’s approach to the first two issues. 

The Commission initially had concerns that a syndicated term loan used by e& to finance the transaction amounted to a foreign subsidy, as four out of the five syndicate members were UAE state-controlled. Ultimately, however, in phase two the Commission concluded that the term loan was not a foreign subsidy as there was insufficient evidence to conclude that e& could not have obtained the loan under normal market conditions. e& had submitted that the term loan was on market terms, in light of a private lender’s involvement in several tranches of the loan, whose actions were not attributable to a third country. These submissions were supported by an economist’s report aiming to show that the loan was in fact on market terms. 

However, with respect to the applicability of ordinary bankruptcy law to e&, the Commission concluded that a foreign subsidy was present. In short, the Commission considered that e& was subject to an “unlimited guarantee” as, in the absence of anything to the contrary in its constitutional documents, e& was excluded from the scope of local bankruptcy laws by virtue of being UAE State-owned. In addition, other provisions gave investors comfort that the UAE government or EIA could be expected to intervene and pay e&’s debts if it were faced with insolvency. e& submitted that there were no laws or regulations requiring the UAE Government to do this, but the Commission considered that it was not necessary to identify such an explicit obligation “where the factual and legal circumstances at hand demonstrate that such a guarantee exists”.

Certain loans and grants from the UAE government to EIA were also found to amount to foreign subsidies, as e&/EIA failed to provide information requested by the Commission in order to assess whether they had been advanced on market terms.

Distortion of competition

Having identified the existence of foreign subsidies, the Commission’s assessment then turned to whether these subsidies had a distortive effect on: (i) the acquisition process; or (ii) the post-transaction activities of the acquired entity within the EU.

The Commission found that while the unlimited guarantee may have improved e&’s competitive position in the acquisition process, this did not lead to actual or potential negative effects on competition, given: (i) the Commission did not identify any other parties that were potentially interested in purchasing PPF, and therefore might have been outbid by e&;³ (ii) the valuation of PPF did not depart from comparable transactions in the same industry; and (iii) e&’s cash position was such that it could have acquired PPF absent the unlimited guarantee. 

In contrast, the Commission concluded that the “unlimited guarantee” received by e& could have distortive effects in the EU telecoms markets following the transaction. It considered that, post-acquisition, the combined entity could benefit from preferential financing conditions in the EU – particularly due to the unlimited guarantee that would enhance its credit profile and reduce its exposure to financial risk. The Commission found that this subsidised financial capacity could strengthen the competitive position of the merged entity by allowing it to invest more aggressively in capital-intensive areas such as spectrum auctions, content licensing, and infrastructure deployment. It also took into account feedback from competitors and national regulators pointing to tangible impacts on competition, ultimately concluding that the ability to draw on state-backed financial support would give the merged group an unfair advantage in the EU market.

The Commission did not identify any positive effects to counter the distortive effect of the foreign subsidies. e& argued that its acquisition of PPF would lead to improvements in PPF’s services, but the Commission considered this to be irrelevant, as such positive effects were not related to the foreign subsidies under consideration, but to the transaction itself.

Behavioural commitments

To address the Commission’s concerns, the approval decision was made subject to the following, rather far reaching, behavioural commitments⁴:

The removal of the UAE's unlimited state guarantee. This was effected by e& committing that its articles of association do not and will not contain provisions that conflict with, disapply or override any provisions of the UAE’s applicable bankruptcy law.⁵

e&/EIA being prohibited from providing any financing (whether debt or equity) to PPF, if this in any way relates to PPF's activities in the EU (subject to certain limited exceptions concerning non-EU activities and “emergency funding”), as well as a requirement for transactions outside of this perimeter to take place on market terms.

Requiring e& to inform the Commission of all future acquisitions (regardless of whether they meet FSR thresholds) where the target undertaking is established in the EU. 

These commitments will apply for ten years (extendable for a further five years by the Commission), with compliance to be overseen by a monitoring trustee. 

Analysis and key takeaways

Despite almost a year having passed since the Commission opened its in-depth investigation, and the FSR merger notification regime having been in effect for over 18 months, at the time of writing this remains the only phase two review initiated by the Commission.[6]

Whether this indicates that we can expect very few interventions in transactions by the Commission under the FSR remains to be seen. What we can say from the non-confidential decision, however, is that the Commission appears to have conducted a very rigorous (but timely) investigation of the FFCs notified to it, taking in legal, economic, and commercial considerations, whilst adopting a pragmatic approach in agreeing a package of behavioural remedies to address the concerns it identified.

With that in mind, there are a number of takeaways from the decision that will be relevant for merging parties when considering a transaction that is likely to fall within the scope of the FSR:

• Cooperation: The decision makes clear that an FSR process can be very burdensome for the parties involved, and that cooperation with the Commission is key to navigating the process as efficiently as possible. The Commission issued a substantial number of RFIs in this case, some of which – in relation to EIA’s financial arrangements in particular – were not adequately responded to. This allowed the Commission, pursuant to Article 16(3) FSR, to deem the relevant measures as conferring a benefit on EIA; highlighting the importance of complying with the Commission’s RFI deadlines and clarifying any RFI queries at the outset. 
   
• Preparation: To mitigate the burden an FSR investigation can impose on merger parties (and avoid adverse inferences being drawn from failures to provide requested information) it is important for them to consider the relevance of the FSR very early in the transaction process. Not only will this assist with transaction planning (especially as pre-notification periods can be lengthy – although they have been reducing in recent months), but by collating, keeping and regularly updating records of FFCs received from third countries, parties will be much better placed to respond to RFIs on them. State-owned or linked acquirers in particular should consider the extent to which their governance and financial arrangements could give rise to an inference that they enjoy a de facto state guarantee, even where no formal guarantee is in place.
   
• Economic analysis: Economic evidence submitted by e& appears to have been influential in persuading the Commission that its term loan was not a foreign subsidy for FSR purposes – despite it potentially falling under Article 5 FSR, as a “subsidy directly facilitating a concentration”, which is “most likely to distort the internal market”. This demonstrates that, where appropriate, economic analysis can be essential in supporting legal submissions and rebutting the Commission’s concerns. Merger parties should therefore consider engaging with economists early on, to identify if it would be worth exploring such avenues. 
   
• Remedies: The case suggests that the Commission is willing to take a flexible approach vis-a-vis remedies and will, where circumstances allow, accept commitments that are behavioural in nature rather than structural (such as a hiving off of the recipient of the subsidy, or ring-fencing it from entities active in the EU), and tailored to the theories of harm identified. It is notable, however, that the parties submitted their initial commitments only 5 weeks into the phase two process. These were then confidentially market-tested with their competitors, before being revised and further assessed by the Commission, then finally accepted in late September 2024. Merger parties moving into phase two may similarly want to consider front-loading their remedies discussions in this way, to obtain as favourable an outcome as possible. 

¹ FFCs received by both the acquirer and target or the joint venture assets (or, in the case of a merger, all merging parties) count towards the relevant threshold.

² According to Article 3(1) FSR, “a foreign subsidy shall be deemed to exist where a third country provides, directly or indirectly, a financial contribution which confers a benefit on an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to one or more undertakings or industries”.

³ This was supported by the fact that no third party submitted comments in this respect to the Commission, and the target’s competitors’ RFI responses to the Commission confirmed their lack of interest in acquiring the target.

⁴ Contrary to the position under the EU Merger Regulation, where commitments can be accepted during the Commission’s phase one review, under the FSR, commitments can only be accepted during the phase two review period.

⁵ e&’s controlling shareholder also committed not to propose or vote in favour of any resolution to change e&’s articles of association in such a way.

⁶ See here our review of the FSR one year in.