ADNOC's Covestro deal in EU crosshairs over subsidies

By Bart H. Meijer and Foo Yun Chee

BRUSSELS (Reuters) -Abu Dhabi state oil giant ADNOC's 14.7 billion euro ($17.2 billion) bid for German chemicals company Covestro may face hurdles after EU antitrust regulators opened an investigation on Monday into potential distortions caused by foreign subsidies.

ADNOC struck the deal to buy Covestro last October, marking its biggest ever acquisition and one of the largest foreign takeovers of an EU company by a Gulf state.

The European Commission, which has been reviewing the deal under its foreign subsidies rules since May, opened an in-depth investigation on Monday, warning that subsidies granted by the United Arab Emirates could distort the EU internal market.

The Commission, which acts as the EU competition enforcer, said the possible foreign subsidies include an unlimited guarantee from the UAE, as well as a committed capital increase by ADNOC into Covestro.

"ADNOC may have offered an unusually high price and other favourable conditions, which may have deterred other investors from making an offer," it said in a statement.

The EU investigation will also look into possible negative effects in the internal market resulting from the merged company's activities once the deal is concluded.

ADNOC said it disagreed with the Commission's preliminary findings.

It said it was "confident that when the facts are fully examined there will be no reason to hold up clearance of a transaction that will add great value for all stakeholders and stimulate European industry".

"XRG and Covestro remain in constructive discussions with the European Commission and are cooperating to conclude the FSR review," Covestro said in a statement. XRG is the international investment arm of ADNOC.

The Commission set a December 2 deadline for its decision on the deal.

The EU's Foreign Subsidies Regulation (FSR) focuses on unfair foreign aid for companies in a bid to rein in unfair competition from non-EU companies subsidised by their governments.

UAE telecoms group e& secured EU approval to buy parts of Czech telecoms company PPF last year after agreeing to scrap an unlimited state guarantee and not to channel foreign subsidies to the activities of the merged company in the EU.

($1 = 0.8569 euros)

(Reporting by Bart Meijer. Additional reporting by Patricia Weiss in Frankfurt and Bartosz Dabrowski in Gdansk. Editing by Louise Heavens, Mark Potter and Jan Harvey)