EU State Aid – An overlooked element of transaction strategy

EU State Aid – An overlooked element of transaction strategy

Despite Covid-19, M&A is on the C-suite agenda

As the world is grappling with the response to the Covid-19 pandemic, many suggest that the outlook for business is distinctly negative.  The latest EY Capital Confidence Barometer survey – see article ‘How do you find clarity in the midst of the COVID-19 crisis?’ and a link to the survey – shows that three-quarters (73%) of C-suite respondents expect the impact from Covid-19 on the global economy to be severe..  However, businesses are thinking about the medium term and beyond.  Our Capital Confidence Barometer survey shows 56% of businesses are opting to transform through transactions and plan an acquisition in the next 12 months.  Two additional indicators validate this C-suite outlook.

First, historically, M&A activity has correlated strongly with the evolution of stock prices and risk, as measured by implied volatility. From 2000 through 2019, the correlation between the value of the MSCI World Index, drawn from stocks in developed countries, and M&A volume was approximately 80%.[1]  That Index was at a low on 23 March 2020, having dropped to where it was in June 2016.  As of June 2020, it had returned to June 2019 levels.[2]

Second, although 2019 saw a lower level of M&A activity compared to 2018, it was higher than the levels in 2016 and 2017.[3]    Absent the Covid-19 pandemic, this suggests there is a high level of latent M&A appetite.  Reports suggest that there is currently an abundance of cash ready to be invested by Private Equity and Sovereign Wealth Funds; According to M&A Review, “…That “Dry powder” has increased steadily over the past years, reaching USD 2.5 trillion in 2019 (roughly a third of which is in Buyout Funds).”[4]

Possible targets are financially weak

Many businesses are facing financial distress and have turned to the state to provide financial support.  Such support may have conditions attached to it – organizations must remember the obvious: Loans have to be repaid. State money in exchange for equity in a business (whether directly or via a hybrid loan) means a change in the shareholder mix.  In some areas, notably the EU, state-funded recapitalization includes a number of measures that impose a ‘ratchet rule’ whereby a higher level of repayment interest applies, to encourage repayment of the state’s injection of funds.  Specifically for the EU, the ratchet will click-in four years from the equity funding and ratchets up again in year six.  For state-funded recapitalization that occurs in 2020, this means important decisions need to be taken before 2024 and 2026 by organizations receiving EU aid concerning their capital agenda.

Possible targets may have few exit options

If the state aid cannot be repaid and if a ratchet mechanism applies, a possible target may have few options.  Re-financing using private sources, typically bank loans or corporate bonds, are possibilities but a business that cannot re-pay the state aid from own resources (current or projected revenues) is probably not an attractive entity for lenders to consider.  That means the cost of such re-financing is likely to be at the high end of the market, a situation the possible target may consider an undesirable or even unacceptable basis to enable future growth.

Divestment of parts of the business may be raised as a strategy to pursue.  As our 2020 Global Corporate Divestment Studysee article ‘How can divesting help build resilience and drive value beyond the crisis?’ – suggests, the economic downturn is providing an impetus for sellers to take action, with more than three quarters (78%) planning a divestment, and with 65% rebalancing portfolios as a result of the crisis.  At least in the EU, this can be reinforced by measures imposed alongside the state aid.  If the possible target holds market power, while the state equity participation exists, states must impose a requirement to reduce market size, which can include forced sale of part of the business that holds market power.

“Divestments of non-core businesses can be a good measure to fortify balance sheets in order to pay back state aid or state guaranteed loans. According to our 2020 Global Corporate Divestment Study, selling in the last downturn boosted total shareholder returns over the long-term”.

Carsten Kniephoff

EY EMEIA Sell and Separate Leader


Possible targets may not be able to make acquisitions

At least in the EU, state-funded recapitalisation must be materially reduced, otherwise, the possible target cannot itself acquire competitors.  Even acquisitions upstream or downstream can raise issues both in relation to questioning the validity of the state aid, and in obtaining competition authority consent for a transaction.

Additionally, over the last couple of years there has been an increase in Foreign Direct Investment rules, with more countries imposing regulatory reviews of transactions by foreign buyers.  One of the emerging points within this protectionist theme is closer scrutiny by regulators (whether using FDI or competition rules) of foreign buyers that are benefitting from state aid.

Possible targets may have other conditions

The European Commission has recently approved, under EU State aid rules, a €7 billion French aid measure consisting of a state guarantee on loans and a shareholder loan to Air France to provide liquidity to the company in the context of the Covid-19 pandemic.  As part of this State aid grant, France also announced intentions to prioritize certain green policy choices regarding  Air France (details are not publicly available).[5]  Additionally, France’s Economy Minister is reported to have stated that Air France would need to cease operating a number of domestic routes.[6]

Such conditions may limit a possible target’s commercial freedom and might affect its financial standing and/or its competitive position.  Another example, this time in the context of state-funded recapitalization, is that at least in the EU, during the period that the recapitalization measure has not been fully redeemed, beneficiaries cannot make dividend payments, nor non-mandatory coupon payments, nor buy back shares, other than in favour of the State.

State aid to possible targets might be deemed unlawful

At least in the EU, unlawful State aid must be repaid together with interest.  The prospect of repayment where there is an allegation of unlawful State aid can be a serious issue for a possible target.  For example, the European Court of Justice ruled on whether the FF20bn ($3.3bn) State aid package paid by France to Air France in 1994 was unlawful.[7]  It is reported that Air France needed a successful outcome – the Court dismissed the claim that the State aid was unlawful – in order to pursue the privatisation of Air France, seen as vital for the survival of the carrier.[8]


If you are considering your transaction strategy and how to implement it, the following questions should be explored first, given the prevalence of State aid during the Covid-19 pandemic:

Is my business a recipient of State aid which limits its ability to make acquisitions?

Among the group of possible targets, which have received State aid?

What are the financial consequences in the medium term for the possible target?

What are the commercial limitations on the possible target due to conditions of the State aid?

What exit options does the possible target have and in what timeline?

Will the State aid have to be repaid immediately upon acquiring the possible target?



[1] Source, Boston Consulting Group at

[2] Source, CNBC live report at

[3] Source, Mergermarket at

[4] Source, M&A Review at

[5] Source, European Commission at

[6] Source, BBC at

[7] Source, European Court of Justice, Case T-358/94 at

[8] Source, FlightGlobal at