How Injection of Public Capital Can Be Free of State Aid

Injection of public capital in an undertaking conforms with the market economy investor principle when: The public investment is equal and concomitant to private investment. The public investment has economic significance and is not followed by disengagement of private investors. The recipient undertaking is in a healthy financial position. The recipient undertaking compares favourably to its peers. The investment is profitable and the expected profit compensates for the risk.
This article reviews two related Commission decisions. They both deal with injection of public money in the share capital of Italian agricultural undertakings. In both cases the Commission concluded that the Italian authorities acted as private investors seeking an adequate return on their investment.However, only one of the two decisions is examined in depth here. This is because they are very similar. But, they also have a number of important differences which are identified at the end of the article. In the first case, which concerns a meat processing cooperative and which is the one reviewed in more detail, the Commission focused on a comparison between the company and its peers. In the second case, which concerns an edible oil producer, the Commission paid particular attention to calculation of the return on investment and the cost of capital.
Case 1: Investment in a meat processor
The investment assessed in Commission decision SA.38876 concerns a capital injection by Istituto Sviluppo Agroalimentare [ISA], a state investment agency, in Carnj Societa Cooperativa Agricola [Carnj], an agricultural cooperative.[1] The measure was notified by Italy in June 2014 for purposes of legal certainty. Italy argued that the capital injection conformed with the market economy investor principle and, after a thorough analysis, the Commission agreed and declared the investment free of State aid.The capital injection is intended to finance an investment plan that aimed to optimise production processes, establish a bio-gas plant and purchase a new slaughter line.Carnj Coop is a large company with 1587 employees and a turnover of EUR 266.4 million. It slaughters, processes and packages poultry and rabbit meat products and, to a smaller extent, pork and beef. Carnj is a cooperative owned by agricultural enterprises of the group Fileni and other shareholders. Carnj’s production is almost entirely sold to Fileni that deals with their placement on the market.

Fileni is a co-investor in the project. Fileni is the third largest poultry and rabbits’ producer in Italy and the first producer of white meat from organic farming.

The investment plan of Carnj was prepared according to the long-term commercial development plan of Fileni. It sought to increase sales volume and focus on high value-added products. The amount of the investment was EUR 20 million, with ISA and by Fileni contributing equally EUR 10 million each.

The Commission noted that “(20) although the investment by ISA is structured as an equity investment, it shows some characteristics of a loan (e.g. guaranteed minimum and limited maximum return, fixed term, postponed participation in losses). […] Also, the funds are earmarked for a specific period and for a specific purpose”. Indeed ISA was guaranteed a minimum return of 4.25%. However, its plans indicated that it expected a return of about 6%.

Carnj was obliged to distribute dividends, in case it made profits. The shares of ISA enjoyed several privileges:

  • The right to vote at ordinary and extraordinary meetings.
  • Priority in the distribution of profits.
  • Priority in the reimbursement of capital and goodwill.

According to the information submitted to the Commission, the average interest rate applying to financing from banks obtained by Carnj was approximately 3.54%. As mentioned above, the minimum guaranteed return to ISA was 4.25% and therefore was higher by approximately 0.7 percentage points compared to loans granted by banks to Carnj. The average expected return for ISA of 6% also appeared higher by approximately 2.5% points compared to the average interest rate on commercial loans obtained by Carnj.

However, ISA also accepted certain obligations. ISA committed not to exercise its right of withdrawal before the eighth year from the date of the share subscription and no later than the tenth year. It had, however, the right to early termination in case Carnj breached any of its obligations.

The terms of the investment also determined the conditions and price of exit of ISA. The exit price of ISA’s shares would be equal to their nominal value at the time of withdrawal, including capital increases or reductions due to capital losses, plus increased goodwill produced every year, minus amounts already paid to ISA in the form of dividends.

The financial situation of Carnj

The accounts of Carnj showed that its revenue had been increasing. EBITDA [earnings before interests, taxes, depreciation and amortization] and EBIT [earnings before interests and taxes] remained stable in relation to the value of production, with EBITDA around 2% and EBIT around 1%.

The liabilities of Carnj were made up of long-term liabilities (equity and loans). The net financial position of the company was about 3.5 times EBITDA.

Carnj was also compared to its peers in order to determine how well it was performing. A valuation of the company was carried out by taking into account statistics of its peers in the same industry. A benchmark analysis was performed by comparing the indicators of profitability, financial solidity and strength of assets. The sample was selected from national operators deemed comparable in activity and product range and having the same legal form and turnover within a range between EUR 100 million and EUR 350 million.

In addition, there were economic and financial projections to identify possible impacts of the investment on the company and of market developments on the investment plan.

The comparative and benchmark analysis showed that with respect to profitability rates, Carnj was consistently higher than all other companies in the sample.

Checking for absence of State aid

In order to determine whether the capital injection was free of State aid, the Commission took into account the following criteria:

  1. The public investment is equal or proportional to the private investment.
  2. The public investment is concomitant to the private investment.
  3. The public investment has economic significance.
  4. The recipient is in a healthy financial position.
  5. The profitability of the investment is sufficient with regard to its risks.
  6. The public investment is not be accompanied by the disengagement of the private investors.

With respect to the first three criteria, it concluded that “(79) ISA will receive a number of shares corresponding to the invested amount; therefore, the capital injected by the public investor will be proportionate to the number of shares it will hold.” “(80) The acquisition of share capital by ISA in Carnj will take place at the same as (or more favourable conditions than) those applying to Fileni as co-investor, which shall subscribe the corresponding amount in the form of cash contribution. Therefore, it can be concluded that the private investor’s share in this investment has a real economic significance.”

A footnote at this point of the decision refers to the relevant case law and decisional practice of the Commission on the application of the MEIP: C-334/99, Germany v Commission, para. 133; T-228/99 and T-233/99, Westdeutsche Landesbank and Land Nordrhein-Westfalen v Commission, para. 255; T-129/95, T-2/96 and T-97/96, Neue Maxhutte Stahlwerke and Lech-Stahlwerke GmbH v Commission, para. 104. Decisions N 191/1998 (Pomella); N 652/1999 (Granarolo); N 164/2000 (Floramiata); N 342/2004 (Valle del Leo); N 170/2005 (Conserve Italia); N 102/2007 (GIV Verona).

In addition, the Commission assessed the financial position of Carnj. It found it to be “(83) […] sound with a solid equity base and stable profit margins. It is a well-established company, economically and financially sound, whose revenues have been steadily increasing over the last three years, with a return always positive and in line – taking into account the mutualistic aims – with competitors in the market.

The Commission also examined the viability of the Carnj and established that Carnj had not suffered from capital losses, nor did it show any signs of difficulty such as diminishing turnover, growing stock inventories, excess capacity, declining cash flows, mounting debts, rising interest charges and/or falling or nil net asset value.

Then it considered whether the profitability of the investment was sufficient with regard to its risks. It recalled that ISA would have the right to a minimum guaranteed return of 4.25%, increased by a spread based on the performance of the Carnj up to a possible maximum of 7.75%, with an expectation for about 6%. “(90) This yield, equated to the actual success of the operation and standing at a level between fixed minimum and maximum, appears to be consistent with the risk profile of the transaction. The expected return is in line with the market and, moreover, a series of „safeguards“ is attached to the proposed intervention (minimum rate of return, shares financing partner).” “(94) […] The Commission also notes that the equity instruments issued for ISA benefit from a „protection“ in the event of losses compared to other shares, which further confirms that the risk-return profile of the operation is as well satisfactory.” “(95) […], based on the above evidence, the growth forecast appears reasonable.”

The Commission was also concerned that “(102) […], the proposed investment shows some characteristics of a medium to long-term loan. It therefore seemed useful to compare the expected return for ISA with the conditions obtained by Carnj on the debt capital market, in order to verify both the reasonableness of the expectations of ISA compared to a private investor’s expectations and the respect for the MEIP (in particular relating to the yield, which shall be in line with normal market conditions).” “(103) The loan financing profile of Carnj has been moving in the spread of 120-150 basis points which suggests a rating of BBB-BB (under the normal collateral assumption). Italian government bonds (10 year gross yield), which can be considered at similar risk, stood at the time of notification of the investment to the Commission at 2.8%. The investment into Carnj capital offers an initial guaranteed rate significantly higher, moreover, with the upside potential of a rate of 7.75%. Moreover, German government bonds (10 year gross yield) stood at the time of notification at 1.4%. Adding a risk margin of 200 bp would give a rate of return of 3.4%, which is approximately 0.8 percentage point lower than the proposed guaranteed minimum return. Therefore, the profitability of the investment seems adequate.”

The Commission also confirmed that ISA’s participation would not be accompanied by the disengagement of the private investors. Indeed, Fileni was committed to subscribe an amount equal to the investment of ISA.

Potential aid elements

Lastly, the Commission checked that there was no hidden State aid in the investment. It explained that “(110) certain elements of the described investment may still raise the question whether they involve an aspect of aid […] when the holding is a short-term one and with duration and selling price fixed in advance.”

“(111) In the case at hand, while the duration of the project is fixed, though guaranteeing a flexibility from 8 to 10 years, as well as a protective mechanism of early withdrawal under specific conditions, only the minimum rate of return is fixed, while the actual yield will depend on the performance of Carnj during ISA’s presence in its capital, within the minimum and maximum fixed levels. The selling price will depend on the market price of the Carnj’s participating instruments at the time of exercising the exit option, including the value of goodwill created during ISA’s participation.” As a result of these considerations, the Commission concluded that there were no hidden elements of State aid.

It then added that “(112) the structure of equity investment follows the structure of MEIP measures financed by ISA in the past and approved by the Commission”. At this point a footnote referred to the relevant cases from the decisional practice of the Commission: N 102/2007 „GIV Verona“; N 342/2004 „Valle del Leo“; N 164/2000 „Floramiata“; N 423/2010 „Amalattea“; SA. 35180 „Ferrarini“; SA. 36178 „CCDP“; SA. 38298 „Olio Dante“.

Case 2: Investment in an edible oil producer

The investment assessed in Commission decision SA.38298 concerns a capital injection by ISA into Olio Dante, a new company belonging to the Mataluni group which is one of the primary producers, processors and distributors of edible and seed oils.[2] ISA will invest EUR 15 million and Mataluni another EUR 15 million. ISA’s investment will be in preferred shares for eight years and is guaranteed a minimum return. The preferred shares will have voting rights, priority in distribution of dividends and protection in case of losses.

The exit price of ISA’s investment will be calculated according to the following formula:

E = V + G – Σd

which is exit price = value of initial capital + goodwill (appreciation of the value of the company) – sum of dividends paid out.

The first year accounts [2014] are as follows:

Assets [EUR, million] Liabilities [EUR, million]
Tangible assets: 24

Intangible assets: 97

Financial assets: 1

Inventories: 0.5

Equity: 82

Long-term debt: 37

Other debt: 0.4

Deferred income: 3.1

Total assets: 122.5 Total liabilities: 122.5

Unlike the previous case of investment in Carnj, the valuation of Dante Oil was carried out using the method of discounted cash flow [DCF]. This method estimates the value of the share capital of a company [the equity value] according to its ability to produce an adequate level of cash flows to meet the expectations of remuneration of a private investor in the long run.

The Commission decision provides a break-down of the parameters and the values that were taken into account to calculate the cost of capital. They are as follows:

Cost of capital

Equity [E]

Risk-free return [Rf]

Market return [Rm]

Beta [b]

Cost of Equity [Ce]

Debt [D]

Cost of Debt [Cd]

Tax rate [t]

Net cost of debt [Cn]

Share of equity: E% = E/(D+E)

Share of debt:            D% = D/(D+E)

E = 82

Rf = 3.80% [8-year government bond]

Rm = 13.80%

b = 0.7

Ce = Rf + b×(Rm – Rf) = 10.80%

D = 37

Cd = 5.27%

t = 31.4%

Cn = Cd×(1 – 0.314) = 3.61%

E% = 69%

D% = 31%

Weighted Average Cost of Capital: WACC WACC = Ce×E% + Cn×D% = 8.57%

Using a WACC of 8.57% and an annual rate of growth of revenue of 2%, it could be shown that the future cash flows would be sufficient to cover the amount of the investment.


[1] The full text of the Commission decision can be accessed at:

[2] The full text of the Commission decision can be accessed at:



Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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