Europe welcomes Middle East money but some deals face headwinds

As Abu Dhabi’s ADNOC sets its sights on an EUR11.7bn($12.74bn) takeover of German chemical maker Covestro in what would be the largest European acquisition by a Middle Eastern buyer in at least 16 years, it marks a recent upswing in dealmaking between the regions.

More than $24bn in acquisitions of European assets by Middle Eastern buyers have been announced or completed so far this year, the most for the period since at least 2008 and 74 per cent above the average in the last 10 years, according to Dealogic.

It is up from just $4.9bn in the same period last year.

Gulf investors are being drawn to Europe by company valuations that lag those in the US, an easier regulatory backdrop for buyers from the region, and where investment needs make them more welcome, advisers and analysts told Reuters.

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

“There is a need in Europe, especially on some of the very large infrastructure projects, for deep pocketed investors”.

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

“The UAE have a very clear strategy of creating global champions in the industries they know well and they perform well in,” he said. “They have experience, vision and the capital to do so. They are very business-driven and politically they are seen positively.”

European stock market valuations as measured by their price-to-earnings ratios have been falling in recent years relative to their history and in comparison with the US market, according to LSEG data.

“Attractive valuations and lower investment scrutiny and geopolitical risk are valid reasons for (Gulf Cooperation Council) investors,” said Diego Lopez of sovereign wealth fund tracker Global SWF, noting their focus on infrastructure and energy assets.

Across the Atlantic, the Committee on Foreign Investment in the US (CFIUS), which reviews the national security implications of foreign investments, has already blocked Middle Eastern parties from owning certain assets, according to reports.

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

In Europe, cross-border deals are scrutinised by each country separately, although the European Commission is seeking more coordinated control.

Lopez said that scrutiny was generally less intense than in the US. “Certain EU countries have been setting up national bodies akin to CFIUS, but they are generally more lenient.”

Still, it is not all smooth sailing.

Last month, talks between Abu Dhabi’s TAQA and Naturgy’s largest shareholder over a proposed takeover of the $22bn Spanish energy firm collapsed in part because disagreements over future governance, according to people with direct knowledge of the discussions.

The shareholder, Criteria, the state-backed Abu Dhabi power and utility company and Naturgy all declined to comment.

While regulatory concerns may be less of an issue in Europe than in the United States, firms seeking tie-ups in the European Union have also faced political hurdles.

The Spanish government publicly opposed Saudi group STC’s acquisition of a stake in Telefonica, and STC is yet to convert part of its holding – consisting of 4.9 per cent in shares and financial instruments that give it another 5 per cent – into voting shares, which requires government approval.

Although Madrid has not made any public pronouncement on the conversion, it has invested around EUR2.3bn euros to acquire a 10 per cent stake in the group to counterbalance STC’s acquisition.

In UK, officials cleared Abu Dhabi-based telecoms company e&’s acquisition of a 14.6 per cent stake in Vodafone only after ordering the British telecoms group to take steps to manage national security risks they said the deal posed.

The UK also ultimately blocked an Abu Dhabi-backed group’s takeover plan for Britain’s Telegraph newspaper.

Tie-ups are also taking time.

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

Linklaters’ Martin said some deals were taking longer to close because of antitrust and increased foreign investor screening.

“In certain strategic sectors, any investor from outside of Europe who is making a material investment in a European asset is likely to be subject to scrutiny. This adds layers of scrutiny and complexity.”

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