In a landmark move, Abu Dhabi’s ADNOC has launched an ambitious €11.7 billion ($12.74 billion) bid to acquire German chemical giant Covestro. If successful, it would mark the largest European acquisition by a Middle Eastern buyer in over 16 years, signaling a surge in cross-regional dealmaking.

Middle Eastern buyers have announced or completed over $24 billion in European asset acquisitions so far this year, the highest for this period since 2008 and 74% above the decade-long average, according to Dealogic. This marks a significant leap from $4.9 billion in the same timeframe last year.

Key Drivers Behind the Surge

Analysts and advisers point to several factors attracting Gulf investors to Europe:

• Valuation Gaps: European company valuations, measured by price-to-earnings ratios, have been declining relative to the U.S., making them more appealing.
• Favorable Regulation: Europe’s regulatory environment is seen as less stringent compared to the United States, particularly in sectors like infrastructure and energy.
• Investment Needs: Europe’s increasing demand for capital-intensive projects has made Gulf investors more welcome.

“Middle East strategic investors are now much more confident investing in Europe,” said David Martin, a corporate partner at Linklaters. “There is a need in Europe, especially for large infrastructure projects, for deep-pocketed investors.”

Miguel Azevedo, Vice Chairman for the Middle East and Africa at Citi, highlighted the UAE’s proactive approach. “The UAE has a clear strategy of creating global champions in industries they excel in,” he said. “They bring experience, vision, and the capital to execute their plans. Politically, they are also viewed positively.”

A Softer Scrutiny Landscape

Compared to the United States, Europe’s scrutiny of foreign investment is generally less intense. In the U.S., bodies like the Committee on Foreign Investment in the United States (CFIUS) impose stringent reviews. For instance, the Biden administration recently forced a Saudi Aramco-backed venture capital firm to divest its stake in a Silicon Valley AI chip startup over security concerns.

In Europe, while cross-border deals face individual country-level reviews, these tend to be more lenient. Diego Lopez of sovereign wealth fund tracker Global SWF noted that “attractive valuations, coupled with lower investment scrutiny and geopolitical risk, are compelling reasons for Gulf Cooperation Council (GCC) investors.”

Still, some European nations are tightening oversight. Countries like Spain and Britain have introduced measures akin to CFIUS, though enforcement remains more relaxed. “In strategic sectors, any material investment by non-European entities is likely to face scrutiny,” said Martin of Linklaters.

Not Without Challenges

Despite the opportunities, hurdles persist. Last month, Abu Dhabi’s TAQA abandoned its $22 billion bid for Spanish energy firm Naturgy due to governance disagreements. The Spanish government has also expressed reservations over Saudi telecom group STC’s acquisition of a stake in Telefónica. STC’s attempt to convert part of its holding into voting shares awaits government approval amid geopolitical sensitivities.

Meanwhile, in Britain, Abu Dhabi-based telecom company e& cleared regulatory scrutiny to acquire a 14.6% stake in Vodafone, but only after agreeing to measures addressing national security concerns. Similarly, Britain blocked an Abu Dhabi-backed group’s plan to acquire The Telegraph newspaper.

Complex and Lengthy Negotiations

The extended timelines of major deals reflect the complexities involved. ADNOC’s negotiations with Covestro have stretched over a year, as have its discussions with Austrian oil and gas group OMV to form a chemicals giant with $20 billion in annual sales.

“Antitrust and foreign investment screening are adding layers of scrutiny and complexity to these deals,” Martin said.

Despite these challenges, Middle Eastern investors remain undeterred, driven by strategic ambitions and the promise of attractive returns. With the ongoing realignment of global markets, the Gulf’s growing footprint in Europe underscores a pivotal shift in cross-regional investment dynamics.