The European Commission has conditionally cleared JD.com’s acquisition of CECONOMY, owner of electronic and home appliances retailers MediaMarkt and Saturn, following an in-depth investigation under the Foreign Subsidies Regulation (FSR). It is only the third M&A transaction to emerge from an in-depth FSR investigation with commitments and the first involving a Chinese acquirer.
That alone makes the decision worth watching. More importantly, however, JD.com/CECONOMY provides another piece of evidence on how the Commission intends to remedy foreign subsidies in transactions.
Together with e&/PPF Telecom and ADNOC/Covestro, the case suggests an emerging approach: The Commission is prepared to accept relatively sophisticated behavioural remedies that constrain how subsidised advantages can be deployed after closing. That can include restrictions on intra-group financing, but increasingly also obligations designed to extend subsidised capabilities or other benefits to third parties.
Three cases are of course too few for a settled remedies policy. But the direction of travel is becoming clearer.
What concerned the Commission in JD.com/CECONOMY?
The Commission found that JD.com had received Chinese subsidies in the form of preferential financing, tax incentives and grants. According to the Commission, those subsidies supported logistics and technological capabilities that would become available to CECONOMY following the transaction. The Commission further argued that those subsidies could also increase the combined group’s capacity to finance its EU activities and engage in aggressive pricing to the detriment of competitors.
This is important because the Commission’s published findings focus on post-transaction competition, not an allegedly subsidised purchase price or bidding advantage. Unlike in ADNOC/Covestro, the Commission’s press release does not say that subsidies potentially distorted the acquisition process itself.
The remedy mirrors that theory of harm:
- JD.com and CECONOMY committed to conduct intra-group transactions, including financing, on market terms.
- JD.com must also make its warehousing and logistics services available to third-party retailers on the same terms as to CECONOMY, and similarly provide its technology services to third parties on the same terms as to CECONOMY.
- The commitments run for ten years and are subject to monitoring by an independent trustee. Reportedly, the commitments do not extend to large competitors like Amazon.
One should note that these were not the parties’ initial commitments. The Commission market-tested a first proposal, competitors identified shortcomings, and the parties strengthened the provisions relating to intra-group financing as well as the terms governing third-party access to logistics and technology. Apparently, some retailers were particularly sceptical about the dependency that relying on JD.com’s infrastructure would bring. So, it remains to be seen how well this part of the remedy will be put into effect by other market participants.
From e&/PPF to ADNOC/Covestro to JD.com/CECONOMY
The three conditional M&A clearances show both continuity and evolution.
In e&/PPF Telecom, the Commission investigated unlimited United Arab Emirates state guarantees and loans. Ultimately, the Commission concluded that the acquisition itself had not been distorted because e& could finance the deal from its own resources and the purchase price reflected market value. Its remaining concern related principally to the combined group’s position after closing.
In response, e& had to remove the unlimited guarantee from its articles of association and, subject to limited exceptions, e& and the Emirates Investment Authority were prohibited from financing the target’s EU activities. Intra-group dealings had to occur on market terms and certain future acquisitions had to be reported to the Commission. The commitments last ten years, potentially extendable by another five.
ADNOC/Covestro added a different ingredient. The Commission identified an unlimited United Arab Emirates state guarantee, a planned capital injection and certain advantageous tax measures. It considered that the subsidies could both have influenced the acquisition process and strengthened the merged entity after closing.
Again, the unlimited guarantee had to go. But the Commission did not require repayment or cancellation of the capital injection. Instead, Covestro committed to provide access to sustainability-related patents on defined terms. The Commission expressly concluded that the benefits generated by this access would balance out the transaction’s negative effects. These commitments also run for ten years, while licences concluded during that period can continue afterwards.
Seen against that background, JD.com/CECONOMY might look less like an isolated solution and more like a refinement.
An emerging playbook?
In my view, three features now merit particular attention:
First, removal of the subsidy itself is not necessarily the starting point. Where an unlimited State guarantee was central to the perceived distortion, as in e&/PPF and ADNOC/Covestro, the Commission required its removal. But other subsidies have effectively been addressed through constraints or countervailing measures rather than repayment.
JD.com/CECONOMY pushes this point further. The published package does not seek to claw back JD.com’s grants, tax advantages or preferential financing. It instead limits how advantages associated with those subsidies can translate into competitive advantages in Europe.
Second, financing remedies appear capable of calibration. e&/PPF involved a broad restriction on financing the target’s EU activities. In JD.com/CECONOMY, financing remains possible, provided it occurs on market terms. That is materially less intrusive.
It would be premature to infer a general hierarchy of financing remedies. But the comparison suggests that the Commission is prepared to tailor restrictions to the particular subsidy and distortion rather than automatically ring-fencing an EU target from its new parent, and that the Commission’s practice in this area might have evolved.
Third, third-party access has now appeared twice. The sustainability-IP commitments in ADNOC/Covestro and the logistics and technology commitments in JD.com/CECONOMY are different in design, but share an underlying logic: Rather than merely suppressing an advantage enjoyed by the merged entity, the remedy spreads a corresponding capability or benefit more widely.
That is perhaps the most distinctive feature of the FSR remedies practice emerging so far. It is difficult to transpose directly from conventional merger remedies because the underlying problem is not necessarily a loss of competition caused by the concentration. It is a distortion attributable to foreign subsidies. The remedy therefore has greater freedom to target the subsidised advantage rather than the transaction’s market structure.
Five practical lessons for future transactions
1. Analyse the post-closing business plan, not only acquisition financing. The Commission’s theory in JD.com/CECONOMY demonstrates that showing that a transaction can be financed without subsidies does not end the scrutiny. How technology, logistics, capital or other subsidised capabilities will be deployed in Europe after closing can be equally important.
2. Map intra-group financing early. Deal teams should understand not just funding of the purchase price, but planned post-closing credit lines, cash pooling, guarantees, capital injections and other support. Depending on the concern, the end point could range from arm’s-length conditions to an effective prohibition on financing EU activities.
3. Remedy planning can start before a formal objection. In e&/PPF, commitments were offered relatively early. In JD.com/CECONOMY, the initial commitments were expanded following the market test. Where credible FSR concerns can be identified during due diligence, potential remedy architecture should be considered early on, not after objections arrive.
4. Test whether an access remedy will actually be used. JD.com/CECONOMY illustrates the point particularly well. If competitors regard access to the subsidised platform, infrastructure or technology as unattractive because it creates dependence on the merged entity, formal availability is unlikely to be enough.
5. Build long-term compliance into the deal model. Ten-year commitments, independent monitoring and market-terms requirements are not closing formalities. They affect transfer pricing, treasury functions, commercial contracting and potentially the strategic integration of the target. Their operational cost should therefore be assessed alongside the regulatory risk of the transaction itself.
Outlook
The Commission’s FSR remedies policy is still being built case by case. There is not yet enough decisional practice to speak of settled rules. But JD.com/CECONOMY strengthens two emerging propositions: An in-depth FSR investigation need not lead to a prohibition even where the Commission ultimately finds distortive foreign subsidies. And the Commission appears willing to use the flexibility of the FSR to design remedies around the competitive effects of subsidisation, rather than simply requiring subsidies to be repaid.
Picture by Rack Manufacturing Expert on Unsplash
