Brussels’ JD probe is an M&A head-scratcher
BREAKINGVIEWS-Brussels’ JD probe is an M&A head-scratcher The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, June 5 (Reuters Breakingviews) - The European Union's Foreign Subsidies Regulation (FSR) was designed to address a genuine concern: foreign companies benefiting from state support in economies like China can gain an unfair advantage when buying European assets. The challenge for Brussels is showing that the powerful new regime is being applied proportionately. Its investigation into JD.com's 9618.HK €2.2 billion ($2.6 billion) bid for German retailer Ceconomy CECG.DE raises questions.
Under the FSR, an in-depth investigation is triggered only when the Commission identifies sufficient preliminary evidence that a non-EU financial contribution "distorts the internal market". Since it came into force in 2023, only two previous cases have hit that bar. But the JD deal looks like an unusual target. Ceconomy, owner of the MediaMarkt and Saturn chains, sells televisions, refrigerators and other consumer electronics in a fiercely competitive market. It is not in critical or strategic areas such as telecom or energy.
JD is also a privately controlled ecommerce company rather than a state-owned industrial champion. That makes the case look different from the European Commission's review of Abu Dhabi oil company ADNOC's takeover of German chemicals group Covestro, where the bidder benefited from an entrenched domestic position and sovereign support. JD is China's third largest e-commerce player, with a 17% share of Gross Merchandise Value (GMV), the total value of goods sold, according to DBS analysts.
The political backdrop helps explain why Chinese acquisitions are attracting attention. European governments have grown warier since Chinese appliance maker Midea acquired German robotics company Kuka in 2016, while wider trade and security concerns have increased foreign-investment scrutiny. Yet those debates typically centred on advanced technologies and industrial capabilities. A retailer selling white goods is hardly critical to Germany's industrial strategy or jobs.
The circumstances are unusual in other ways too. According to a person familiar with the matter, JD was the only bidder for Ceconomy. While that does not rule out subsidies distorting the process, it undermines any suggestion that JD outmuscled domestic rivals with an unusually high price.
The industrial logic seems straightforward. JD specialises in selling electronics online and operating its own warehouses with savvy supply-chain management. Ceconomy's executives worry that without similar infrastructure, it will struggle against large online rivals such as Amazon. If the deal is blocked, competition in German retail may suffer.
The Commission says the FSR applies to all companies, irrespective of nationality or sector. It may yet unearth deeper subsidies that benefit JD. Or it may approve the deal, as with previous investigations involving players like ADNOC. Yet even approval would carry a warning for dealmakers and add costs. If a privately controlled Chinese retailer's acquisition of a European electronics chain warrants a lengthy foreign-subsidy investigation, inbound M&A could get a lot harder.
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CONTEXT NEWS
Chinese e-commerce giant JD.com's bid for German electronics retailer Ceconomy may involve Chinese subsidies, European Union competition regulators warned on May 28 as they opened a full-scale investigation into the deal.
The decision by the European Commission marks its first in-depth probe of a Chinese deal under its Foreign Subsidies Regulation, which targets unfair foreign state aid and could require JD.com to offer concessions to address its concerns.
The preliminary investigation indicates that JD.com may have received foreign subsidies distorting the EU internal market. These include preferential financing, tax incentives and grants provided by entities possibly attributable to the PRC, the European Commission said in a statement.
It said these potential subsidies might have helped JD.com offer a higher price for Ceconomy and to support the German company's activities and growth through JD.com's technological and logistics capabilities that could distort the EU market.
JD.com disputed the EU's concerns, saying the proposed acquisition will not be financed by any foreign subsidies granted by China or any other non-EU member state, but instead is funded by external private bank debt and available cash from ordinary course business activities.
The Commission set an October 2 deadline for its decision.
(Editing by Neil Unmack; Production by Shrabani Chakraborty)
((For previous columns by the author, Reuters customers can click on CHEN/yawen.chen@thomsonreuters.com))
