Spotlight: The details of water firm Sabesp's planned privatization

São Paulo state revealed more details about the privatization of water utility Sabesp, planned to be concluded in the third quarter, despite difficult conditions in local and global capital markets.

Sabesp, Brazil’s biggest water firm, will be privatized in two phases, as São Paulo state, which currently holds 50.3%, will reduce its participation to 18.3%.

The first phase involves the sale of 15% to a single strategic investor and the second the sale of 17% of shares on the equity market, open to individuals and investment funds. 

With the operation, São Paulo aims to guarantee that the company has better access to financing and strengthens its cash flow to accelerate investments and comply with the national universal coverage law, mandating full access to services by 2033.

Sabesp plans to invest up to 68bn reais (US$13.1bn) through 2029, the year it expects to achieve universal coverage, while up to 260bn reais will be invested through 2060. 

“The [share] offer process is within the schedule and expectations of the government of São Paulo. The objective is always to achieve universalization and, therefore, the option of having a reference investor as a partner,” governor Tarcísio de Freitas said in a statement.

But the operation comes amid problems like inflationary pressures that led central banks across the globe to signal that there is limited room for rate cuts, impacting equities market and M&A activities. 

Still, Brazil’s sanitation sector is considered vibrant enough to withstand the tensions.

"We’ll see movements of mergers and acquisitions and capital market operations with low-level stability, a shaky path in the coming months, but there are segments that have been very appealing to investors, even in a more challenging scenario, which are the infrastructure and water sectors in Brazil," Pedro da Costa, M&A and private equity transaction solutions leader of the Brazilian unit of UK insurance and reinsurance broker Aon, told BNamericas.

RULES

Investors who take part in the privatization must follow certain rules. The strategic investor, for example, will not be able to sell shares until December 2029. 

"After this period, it will be able to negotiate the shares under specific conditions, such as binding the buyer of the shares to the investment agreement," according to a press release.

If the investor is another company in the sanitation area, it may not compete for new contracts in areas of interest to Sabesp. This clause comes amid indications that companies such as Aegea and Iguá Saneamento were interested in a minority stake.

"The objective is to ensure that the strategic investor is aligned with the premise of transforming Sabesp into a competitive water services platform with national and even multinational operations," the release said.

BTG Pactual, Bank of America, Citi, UBS and Itaú BBA were hired to coordinate the sales process.