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. Last Updated: 07/27/2016

Nestle Buys Up 'Holy Water'

Critics say the original spring in the Kostroma diocese ran dry years ago and point out that its orange and lemon flavors aren't even blessed.

But that didn't stop Swiss-based food and beverage giant Nestle from paying an estimated $50 million for Saint Springs, or Svyatoi Istochnik, whose nonflavored still and carbonated mineral waters come with the blessing of Patriarch Alexy II.

Saint Springs, founded in 1993 by U.S. investors, has parlayed a never-explained royalty agreement with the Orthodox Church, which denies ever owning a stake in the company, into one of the nation's most recognized brands. It accounts for roughly 10 percent of the domestic bottled water market.

In announcing the deal on its web site Tuesday, Nestle said the acquisition of 100 percent of Saint Springs by subsidiary Nestle Waters "is an ideal opportunity to strengthen its leadership in Europe, gaining a strong base in Europe's most populous country and supporting further developments in Eastern Europe."

Neither side would disclose financial details of the deal, but both Western and Russian media reports have put the figure at $50 million.

"From the perspective of market development potential, the sale gives Saint Springs everything it needs to boost development and sustain its leadership position," said Saint Springs founder and chairman John King. "This deal allows Saint Springs to join the family of the world's best water brands."

Nestle Waters, which includes international brands Perrier, Vittel and San Pellegrino, controls 16.3 percent of the worldwide bottled water market and reported sales of 5 billion euros ($5.03 billion) last year -- making it the world leader. Its chief competitors in Russia are Coca-Cola and PepsiCo with, respectively, their Bon Aqua with Aqua Minerale brands, which have roughly the Minerale brands, which have roughly the same market share as Saint Springs.

With consumers increasingly moving away from heavily mineralized stalwarts Borzhomi and Narzan, industry watchers say Nestle's move promises to usher in a highly competitive era among the international giants.

Nestle Waters spokesman for Russia John Mann said the company expects the domestic bottled water market to grow 20 percent annually over the next few years. "We expect Nestle Waters and Saint Springs to match or exceed this figure," he said.

Pepsi's marketing director for Russia, Alexei Mekhonoshin, has welcomed Nestle's arrival, saying recently that there was plenty of room for expansion into territory occupied by smaller, regional brands.

According to market research company ACNielsen, nationwide bottled water sales rose 28 percent last year, led by jumps of 50 percent in Moscow and St. Petersburg.

According to Renaissance Capital, Saint Springs' financial advisor on the sale, Russia lags far behind Eastern Europe in per capita bottled water consumption, drinking just 8 liters a year -- five times less than Poles and 10 times less than Czechs.

Saint Springs does not make its revenues public, but it does publish its sales volumes, which were 108 million liters last year. Assuming a 10 percent market share, the company probably had revenues of between $30 million and $40 million, according to Vladimir Savov, a retail analyst at UBS Brunswick Warburg.

Savov said that if Nestle did indeed pay $50 million for the company, it paid a premium. "But given the strength of the brand, perhaps this is worth it," he said.

King, an entrepreneur from California, founded the company in 1993. According to Renaissance Capital managing director Richard Olphert, in the early 1990s King saw a potential deal with the Kostroma diocese as a healthy alternative to teaming up with a secular business partner -- who most likely would have had mob connections.

King apparently reached a deal -- it is unclear if it is legally binding -- with the diocese under which the church received fixed yearly royalties in exchange for the right to set up a bottling plant over the spring. The plant is located on a site in the Volga River region of Kostroma, some 300 kilometers northeast of Moscow, that then belonged to the Orthodox Church.

Archbishop Alexander of Kostroma and Gallich, whose signature appears on Saint Springs bottles, said all proceeds go to the restoration of Orthodox churches and monasteries. In 1999, Saint Springs said $1 million had been allocated since the company was established.

The partnership has not always been blissful, however.

Shortly after reaching an agreement, the local mayor asked King to build an apartment block and supermarket for 50 workers. "I let the archbishop talk to him," King said in remarks published at the time.

Vedomosti reported that The U.S.-Russia Investment Fund and the Agribusiness and Framlington funds are minority shareholders in Saint Springs.

Mann said Nestle had no plans to export the brand and that no major management changes were expected. A source close to the deal, however, said King is leaving the company -- and Russia, although he has offered to advise Nestle if asked.

As for the deal with the Church, Nestle said it is keen to preserve it.

"Nestle Waters sees the cooperation between Saint Springs and the Russian Orthodox Church as fruitful and currently has no plans to change that relationship," Mann said.