Fight over Ukraine’s largest mineral water producer lands in deep waters

The fight for the corporate rights of Morshynska, a major water producer in Ukraine, is coming to an end. Soon, Serhiy Ustenko's Karpathian Mineral Waters – Morshynska’s direct competitor – will take over its management.

IDS Ukraine, a company that owns Morshynska and has Russian oligarch Mikhail Fridman among its shareholders, believes that the competitor will destroy the business. IDS Ukraine's management calls for the company to be nationalised in order to ‘save’ it.

The new manager of Morshynska, in turn, promises not to destroy the competitors' plant.

What is going on with Ukraine’s largest mineral water producer and what the future holds for it? LIGA.net has looked for the answers.

How Morshynska water got ‘frozen’

Back in June 2022, the bureau of economic security said it would seize the corporate rights of the producer of Morshynska mineral water, the Morshyn Mineral Water Plant Oscar, which is part of IDS Ukraine.

The reason behind the seizure is that IDS Ukraine has Russian shareholders – namely Mr Fridman's Alfa Group, under Western sanctions since February 2022. The sanctioned shareholders together own 49.99 percent of IDS Borjomi International, which includes IDS Ukraine. In particular, Mr Friedman owns 18.23 percent of the Ukrainian group.

Oscar is Ukraine's largest mineral water producer. According to Opendatabot, an open data consultancy, in 2022 it earned UAH 1.67 billion in revenues, and UAH 5 million in profits. Pro-Consulting, a consultancy, puts IDS Ukraine's share in the Ukrainian mineral water market at 40 percent in the first half of 2022.

IDS Ukraine’s closest competitors are Aqua-Eco, behind the Truskavetska TM, owned by Tomas Fiala, and Serhiy Ustenko's Karpathian Mineral Waters, which owns the Karpatska Dzherelna TM. They hold 13 percent and 8 percent of the market, respectively.

Both water producers wanted to take over their largest competitor, but Mr Ustenko eventually won the fight.

In November 2022, a Kyiv court transferred IDS Ukraine's assets to the management of the asset recovery and management agency (ARMA), a body within Ukraine’s state anti-graft structure. Almost three months later, ARMA announced a tender for the management of the seized assets of Oscar and IDS’s distribution company.

On 23 February, ARMA selected nine tender participants, including those behind Karpatska Dzherelna, Poliana Kvasova, Svaliava, Luzhanska, and Kuialnyk mineral water.

Dragon Capital demanded that a new tender be launched, citing, among other things, an incomplete list of IDS Ukraine's assets. Those included the Myrhorod mineral water plant, also owned by IDS Ukraine, but not included in the ARMA list.

The agency ignored the unsuccessful bidder's appeals and, on 13 March, declared Mr Ustenko's Karpathian Mineral Waters company as the winner of the tender.

However, the company was yet to start managing the assets: Those had first to be assessed, and then a management agreement had to be concluded, providing for an increase in the profitability of the seized assets to ensure budgetary contributions.

Only on 14 April, ARMA announced that it had selected Gabiano, a private company owned by Romas Kriksciunas, to assess the seized assets of IDS Ukraine.

IDS Ukraine runs against the current

Back in early February, the management of IDS Ukraine stated that it continued to effectively manage the business all this time and that the transfer of management to someone else was unlikely to have a positive impact on the company's operations.

In March, Badri Patarkatsishvili, whose family owns 34.83 percent of IDS Ukraine, asked the prosecutor general's office to check whether the assets were legally seized in the first place. He argued that the measure included all the corporate rights and not just those belonging to Russians – but to no avail.

Last autumn, IDS Ukraine's shareholders appealed against the seizure of assets in court – and again, all their complaints were dismissed.

Marko Tkachuk, CEO IDS Ukraine, tells LIGA.net that if the Ukrainian courts failed to defend their case, the shareholders, both British and Ukrainian, planned to sue in international courts, including the European Court of Human Rights.

Immediately after the results of the ARMA tender were announced, IDS Ukraine claimed it had many violations. In particular, Mr Tkachuk points out that the shares to be managed are securities and, per law, require a licence from the national securities and stock market commission – but neither Karpathian Mineral Waters nor any of the other bidders have such a licence.

"In addition, a merger clearance from the antimonopoly committee is still required to appoint a manager. But this was not taken into account either," he stressed.

CEO IDS Ukraine believes that Karpathian Mineral Waters’ main goal is to get rid of a competitor. "Getting a plant under management that can be shut down for any reason, if necessary, and thus developing your own brand is a very attractive idea," says Mr Tkachuk.

New market leader afloat

While Karpathian Mineral Waters has been operating in the Ukrainian market for over fifteen years, it was exclusively a local player for a long time.

The company managed to become one of the top three producers in Ukraine only in 2015 to 2016, the association of mineral and drinking water producers of Ukraine told LIGA.net in a statement.

Now that ARMA has awarded it the right to manage Morshynska’s assets, the company will be able to compete for market leadership in Ukraine. In February, the company announced it planned to build another water production plant in the Lviv region, its production to be sold as early as May 2024.

When asked by LIGA.net why it needed Morshynska, Karpathian Mineral Waters replied that the main goal was to "prevent Ukraine from losing a valuable asset and preserve tax revenues from it."

Interestingly, IDS Ukraine made the same arguments when trying to challenge the seizure of its property.

"The state must prevent Russians from withdrawing assets from Ukraine. This includes the assets of IDS Ukraine," Mr Ustenko said.

"The company pays taxes, that is, provides budget revenues. But the state does not have the competence to manage the asset, while we have this competence and experience. In particular, in 2022, our sales grew by at least 50 percent."

However, one of the obvious motives is earnings from asset management.

"This is standard practice when it comes to managing seized assets. Usually, it's about 20 percent. Sometimes the remuneration can reach 40 percent," an investment company source told LIGA.net on condition of anonymity.

"Therefore, I would not say that it is profitable for Karpathian Mineral Waters to bankrupt Morshynska."

New management sets sail

While a management agreement is yet to be concluded, IDS Ukraine claims that Karpathian Mineral Waters has already started operating, including allegedly demanding that retailers buy Morshynska together with Karpatska Dzherelna.

"In particular, without any legal grounds, the competitor is negotiating from the position of a representative of our companies, their manager," IDS Ukraine said in a statement.

Karpathian Mineral Waters immediately denied this, saying that it negotiates with chains exclusively on its own products.

Several retailers that LIGA.net asked for comment said they have not heard anything about the ‘combined offer’.

The investment company source told LIGA.net that IDS Ukraine's claims against both ARMA appraisers and Karpathian Mineral Waters might soon disappear if the state found a way to nationalise the shares of its sanctioned shareholders.

On the same day, ARMA confirmed that the seized assets of IDS Ukraine would become the property of the state, but there are two ways to transfer corporate rights.

The first option is confiscation in criminal proceedings, during which ARMA manages the asset at the stage of seizure. The other is to recover it in favour of the state under the sanctions mechanism, but nationalisation under the seizure is not possible.