Europe welcomes Middle East money, but some deals face obstacles

With Abu Dhabi-based ADNOC set to acquire German chemicals maker Covestro for 11.7 billion euros ($12.74 billion), it would be the largest European takeover by a Middle Eastern buyer in at least 16 years, underscoring a recent surge in cross-region deals.

According to Dealogic, more than $24 billion in acquisitions of European assets by Middle Eastern buyers have been announced or completed this year, the largest amount for that period since at least 2008 and 74% higher than the average over the past 10 years.

This is an increase of just $4.9 billion over the same period last year.

Gulf investors are drawn to Europe because of lower company valuations compared to those in the United States, a more lenient regulatory environment for buyers from the region and the fact that investment needs make them more welcome, advisers and analysts told Reuters.

“Middle Eastern strategic investors are now much more confident about investing in Europe,” said David Martin, a corporate partner at law firm Linklaters, who helped set up the firm’s Abu Dhabi office.

“In Europe, especially for very large infrastructure projects, investors with large financial resources are needed.”

Miguel Azevedo, vice president of investment banking for the Middle East and Africa at Citi, said investors from the region also bring their expertise to such projects.

“The UAE has a very clear strategy to create global champions in industries that they know well and do well in,” he said. “They have the experience, vision and capital to do it. They are very business-oriented and politically they are viewed positively.”

According to data from LSEG, the valuations of European stocks, measured by the price-to-earnings ratio, have been falling in recent years both historically and compared to the US market.

“Attractive valuations and reduced investment scrutiny and geopolitical risk are important reasons for (GCC) investors,” said Diego Lopez of Global SWF, a firm that tracks sovereign wealth funds, noting their focus on infrastructure and energy assets.

Across the Atlantic, the Committee on Foreign Investment in the United States (CFIUS), which examines the national security implications of foreign investment, has reportedly already blocked Middle Eastern entities from owning certain assets.

Last November, President Joe Biden’s administration forced a Saudi Aramco-backed venture capital firm to sell its stake in a Silicon Valley AI chip startup backed by OpenAI co-founder Sam Altman, Bloomberg News reported.

In Europe, cross-border transactions are controlled by individual countries separately, although the European Commission is working towards more coordinated controls.

Lopez said scrutiny has generally been less intense than in the U.S. “Some EU countries have established national bodies similar to CFIUS, but they are generally more lenient.”

However, not everything is that simple.

Talks between Abu Dhabi-based TAQA and Naturgy’s largest shareholder over a proposed $22 billion takeover of the Spanish energy company collapsed last month, partly because of disagreements over future governance, people familiar with the discussions said.

The shareholders, Criteria, the state-backed Abu Dhabi energy and services company, and Naturgy declined to comment.

While regulatory concerns are not as high in Europe as they are in the United States, companies seeking to do business in the European Union also face political obstacles.

The Spanish government has publicly opposed a takeover of Telefonica by Saudi group STC. STC still has to convert part of its stake – consisting of 4.9% of shares and financial instruments that would give it an additional 5% – into voting shares, which requires government approval.

Although Madrid has not made any public statement on the transformation, it has invested around €2.3 billion to acquire a 10 percent stake in the group as a counterweight to the takeover of STC.

In the UK, officials approved the takeover of 14.6% of Vodafone by Abu Dhabi-based telecoms company e& only after ordering the British telecoms group to take steps to manage the national security risks it said the deal posed.

Britain also finally blocked a plan to take over the British Telegraph newspaper by an Abu Dhabi-backed group.

Breaks also take up time.

ADNOC’s talks with Covestro began more than a year ago, and discussions have been ongoing in Austria for a year between ADNOC and oil and gas giant OMV about creating a chemicals giant with combined annual sales of more than $20 billion. ADNOC declined to comment.

Linklaters’ Martin said some deals were taking longer to close due to antitrust rules and increased scrutiny of foreign investors.

“In some strategic sectors, any non-European investor making a significant investment in European assets is likely to be subject to scrutiny. This adds layers of scrutiny and complexity.”

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