What next in the privatization of Brazil's biggest water utility?

The privatization of Brazil's largest water company, São Paulo state-run utility Sabesp, advanced to the second phase after local holding company Equatorial Energía announced that it would become a key minority shareholder.

Equatorial stated that it would invest 6.9 billion reais (US$1.23bn) to acquire a 15% stake in Sabesp.

Sabesp is being privatized in two phases, with the state planning to reduce its holding from 50.3% to 18.3%.

The first phase involves selling a 15% interest to Equatorial, while the second entails putting 17% on the stock market. The bookbuilding process for the second phase will take place through July 15.

"Without a doubt, this privatization is the most important event in the sector since the regulatory framework was approved in mid-2020. This is because we have never had a sanitation company the size of Sabesp controlled by private sector investors on the Brazilian stock exchange," Percy Soares Neto, founder of water and waste consultancy Ikigai, told BNamericas. 

"Now investors will have the opportunity to better evaluate and price the sector and this could open the door to IPOs of other private companies in the sector." The other 49.7% of Sabesp is already traded on the market.  

The privatization is also expected to have a direct impact on service providers in the water sector.

"The company's processes for hiring goods and services will be much more rapid than when it was a state-owned company. In fact, the company has already told the firms bidding for contracts about this," Marco Botter, CEO of infrastructure company Telar Engenharia, which provides services to Sabesp, told BNamericas.

The change is also expected to increase the company's access to financing, enabling it to accelerate its investments and meet national goals for potable water and sewerage, which mandate 100% coverage of services by 2033.

Sabesp plans to invest up to 68bn reais through 2029, enabling it to meet that target, with as much as 260bn reais set to be invested through 2060.

“Everything is going as expected and that is why we're satisfied with the [privatization] project as a whole, in terms of the budget, or the presence of [Equatorial], the reference shareholder, who will help us, once everything is done, to have better management, better governance and better sanitation for São Paulo state. That is our main goal," Natália Resende, state secretary of the environment, infrastructure and logistics, said in a release. 

Although Equatorial was the only company to submit a bid to buy the 15% stake in Sabesp in the first phase, another company, Aegea, was also interested. 

However, Aegea pulled out because the conditions imposed may have prevented it from bidding for water and sewerage contracts in other states, a source familiar with the company's strategy told BNamericas on condition of anonymity.

The privatization of Sabesp is considered a landmark in a sector that is undergoing major transformations.

In recent years, companies such as Aegea, Iguá Saneamento and BRK Ambiental have planned IPOs on the local stock market but investors have been concerned about a lack of visibility to form fair prices for the operations due to the absence of comparable peers. 

In addition to Sabesp, utilities Copasa, controlled by Minas Gerais state, and Sanepar, owned by Paraná state, have listed shares but investors have been reluctant to buy them as they consider that state-controlled companies have very different characteristics and contract terms from privately controlled firms.