Seizure of Morshynska's assets: How did the transfer of Ukraine’s largest mineral water producer to ARMA management affect the market?
Will the consumers feel the shortage of mineral water?
At the end of November, the Shevchenkivsky District Court of Kyiv placed the assets of IDS Ukraine holding, the country's largest producer of mineral waters under the trademarks Myrgorodska and Morshynska, under the management by the Asset Recovery and Management Agency (ARMA).
It is not the first enterprise and not even the largest one among those brought to the agency. Notably, earlier the agency received the Glukhiv Quartzite Quarry, two thermal power plants in Lviv Oblast, a part of the Samara-Western Direction oil product pipeline, etc. However, IDS Ukraine has no competitors in the ARMA portfolio in terms of importance in the consumer market. For instance, the level of Morshynska brand awareness is close to 96%. The company's market share is about 40%. These parameters make any perturbations with the asset at least sensitive.
Mind looked into how the new status would affect the company's work and whether consumers would feel it.
What is IDS Ukraine for the consumer market? IDS Ukraine is the largest Ukrainian bottled water producer, with a market share of about 40%. The main production sites are Myrgorod Mineral Water Plant and Private JSC Morshyn Mineral Water Plant Oscar. Morshyn valley is a protected area.
Morshynska ranks first in sales among non-carbonated mineral waters in Ukraine. According to the rating of the Top 100 Ukrainian brands by InVenture, Morshynska is the most expensive Ukrainian brand. At the end of 2020, it was estimated at $525 million.
It is symbolic that a green glass bottle of Morshynska has long been an invariable attribute of all government-level events in Ukraine and international meetings. After the transfer to ARMA occurred, this connection with the state has become even stronger.
What is the company’s ownership structure? Entities of IDS Borjomi International operate in russia, Ukraine, and Georgia. Over 17 years, the shareholder structure of the group of companies (including Morshyn and Myrgorod mineral water plants, IDS distribution company and some other companies) has changed several times.
According to the General Director of IDS Ukraine Mark Tkachuk, the direct shareholder, who owns 100% of IDS Ukraine shares, is the Cyprus company International Distribution Systems Limited. The right to control the group of companies is held by members of the family of Badri Patarkatsishvili, who are citizens of the United Kingdom (34% of shares), the Government of Georgia (7.73%) and several minority shareholders (approximately 10%).
"International Distribution Systems Limited is owned by a group of companies that are directly or indirectly owned by the above-mentioned British citizens of Georgian origin, the Georgian government, and shareholders with dual citizenship, one of whom is russian, inluding Mikhail Fridman," the company's press service said in a comment to Mind.
"Shareholders, who have dual citizenship, one of whom is russian, are indirectly related to our business. None of them, including Mikhail Fridman, who has often been mentioned in the press, has any influence on the activities of our group and has no right to control either the business or the decisions made by the management," Tkachuk is cited in the company's press release as saying.
What happened? On November 23, the Shevchenkivsky District Court placed the assets of IDS companies to the ARMA. The transferred assets were movable property, industrial designs, trademarks, and corporate rights in the authorized capital, registered under the name of PrJSC Morshyn Mineral Water Plant Oscar.
The request was initiated by detectives of the Economic Security Bureau of Ukraine as part of criminal proceedings. According to the ESB, russian beneficiaries attempted to withdraw the assets of seven enterprises for the production and sale of drinking water located in Ukraine. We are talking about PrJSC Morshyn Mineral Water Plant Oscar, LLC IDS Aqua Service and LLC Power, as well as corporate rights in LLC Power and LLC IDS Aqua Service.
According to one of the court's orders, the Bureau believes that "a criminal plan was developed to fictitiously withdraw assets located in Ukraine from their ownership under fictitious transactions." The purpose of these transactions is to remove the business from the sanctions imposed on the main shareholders and to avoid the forced seizure of assets.
Representatives of the company, responding to a request from Mind, have said that the information about the export of equipment from the territory of Ukraine is not true. "All equipment is in place. Moreover, we are currently setting up a new production line at the Oscar mineral water plant in Morshyn, which was purchased before the war," the statement said.
Have there really been any legal changes in the status of these assets? As far as we know, not in Ukraine, but they have happened at the parent company’s level.
In June, IDS Borjomi International announced that its majority shareholder would transfer 7.73% of the company's shares to the Georgian government free of charge and would no longer have control over it. This proposal was accepted by the executive branch of Georgia.
As a result, the stake of three russian beneficiaries has decreased to 47.68%, meaning the loss of control. Main shareholder’s representation in the Board of Directors of IDS Borjomi International was reduced from eight to two members.
Whether this transaction fits under the suspicion of "planned to withdraw their assets under fictitious transactions" in the definition of the ESB is unknown.
Does IDS Ukraine work after its transfer to ARMA? Yes, it does. As the production facilities are located in relatively calm regions, manufacturing did not stop after February 24. The main adjustments in the work concerned the organization of safe logistics.
The products are represented in all major retail chains. In addition, the company has started expansion to Poland through Auchan hypermarkets. After the autumn shelling of the energy infrastructure by the aggressor, the company, like most enterprises, experienced power outages.
After passing to ARMA the enterprises continue to operate. Mind verified this by contacting the plant. The current management continues to manage operational activities.
"The company's operational activities have not been stopped, accounts have not been arrested. All taken measures relate to the personal property rights of the company's shareholders, against whom sanctions have been imposed. However, these measures do not concern PrJSC IDS and plants, so they will not affect the economic activity in any way," the company assures.
Nevertheless, many counterparties, assessing the current legal status of IDS Ukraine as uncertain, transferred cooperation to prepayment terms.
What will the defence be based on? According to the court decision, ARMA received 100% of the equity rights of the company. However, not all of them belong to russian owners, who are subject to the law on the nationalization of assets of the aggressor country’s citizens.
It will be the main strategy of the defence, which will try in court to stop the seizure of the shares of other shareholders whose rights are violated by the total seizure.
What will happen next? The state may sell, nationalize or transfer confiscated assets to Ukrainian business for management.
The main task of ARMA is to preserve assets. The Agency holds a tender for an asset manager, and the latter in turn selects an appraiser, and then the assets are evaluated.
The court decides what to do with the seized object. Until now, enterprises continue to work.
Can the consequences of these perturbations be fatal for the consumer market, since IDS is the largest producer in the industry? Today, there are no problems with the supply of mineral water to the market. IDS trademarks are represented in most large retail chains. "Let's separate operational activities from ownership. In fact, the business is an operational activity in which ARMA never interferes. The management is transferred under it to change the ownership, the supervisory body does not directly affect the work," reminds Oleg Pendzin, expert of the Economic Discussion Club.
Even in the case of short-term overlaps or interruptions in supply, it will not have resonant consequences for the consumer market, as was the case, for example, after the shutdown of Artemsil, the country's largest salt producer. "This [mineral water] is not bread, not oil. I do not see any critical risks here," the expert said.
Although, IDS itself is inclined to assess the consequences of the seizure of assets more dramatically, given the leading position in the market of mineral water. "Drinking water is one of the most necessary products of consumption. Our company takes about 40% of the market. Taking this into account, we have assumed responsibility for the uninterrupted supply of a critical product to the population of Ukraine, working even at night and on weekends to compensate for production downtime during the shelling and power outages," Marko Tkachuk, CEO of IDS Ukraine, said in a comment to Mind.
He adds that the company has powerful logistics capabilities and a large warehouse programme in Ukraine, which ensures fast delivery of products to every region of the country.
"Maintaining the uninterrupted operational activity of our enterprises allowed us to transfer free of charge about UAH 55 million worth of products for the needs of volunteer organizations, military, hospitals, IDPs, and people in the de-occupied areas since the beginning of the full-scale invasion. We intend to continue this important initiative for Ukraine," summed up the CEO of IDS Ukraine.
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