Sabesp’s privatization: understand how a follow-on works and find out how the company is doing

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A new share offering will make the Government of São Paulo no longer the controlling shareholder of the company, but will maintain the decision-making power of the State alongside reference shareholders. For investors, the contribution can leverage investment projects and accelerate company earnings. Upscale neighborhoods in Greater São Paulo are supplied by isolated systems, which guarantee water supply in the region; operation is also carried out by Sabesp Victor Moriyama/G1 According to the governor of São Paulo, Tarcísio de Freitas (Republicans), the Basic Sanitation Company of the State of São Paulo (Sabesp) should be privatized via follow on. The mechanism is nothing more than a new offering of shares on the stock exchange, which reduces the government’s total stake in the company. The strategy was released on Monday (31), but still does not have a date to be implemented. The central idea, however, is that the Government of São Paulo ceases to be the company’s controlling shareholder, in exchange for financial support from new shareholders. According to the governor, the public offer will allow the possibility of creating reference shareholders of the company — that is, groups that control the management by having larger shares of shares, which would even keep the government as one of the decision makers. In this way, Sabesp would have a cash reinforcement to, according to the government, anticipate the universalization goals foreseen in the sanitation framework, from 2033 to 2029, in addition to an injection of R$ 66 billion in investments. Still according to the government, the resources will also be used for the modernization of Sewage Treatment Stations (ETEs) and Water Treatment Stations (ETAs), in addition to the installation of two water desalination plants in the municipalities of Guarujá and Ilhabela. The investments will benefit 10 million people in São Paulo, including residents of rural areas and irregular urban occupations. Currently, the State of São Paulo owns 50.3% of Sabesp’s shares (approximately 343.8 million shares). The slice that will remain in the pocket of the government of São Paulo has not yet been defined. g1 talked to specialists to understand whether it is worth buying the shares during the privatization process and what are the risks for investors. What is follow-on? Sabesp is a mixed capital company. This means that it is publicly traded, but is still controlled by the Government of São Paulo. The company made its initial public offering (IPO) in 2002. Now, the company will carry out a follow-on, which is a secondary offering of shares on the stock exchange. Thus, the 50.3% held by the government will be diluted, making it a minority shareholder. Decisions on the next steps in the process will be made by the Secretariat for Partnerships in Investments. It is worth mentioning that the privatization process does not only occur through the sale of shares. First, for it to happen, it needs legislative authorization — and the TCU (Union Court of Auditors) has not yet approved the process. How to buy stocks in the follow-on? There are two basic types of follow on, which are divided into restricted or public. For the restricted ones, the company usually seeks institutional investors directly for large contributions, in exchange for shares of participation in the company. Among the public, the offer is carried out for the entire market, including the company’s shareholders. Sabesp’s model will still be detailed, but the government says it will be public despite actively looking for reference shareholders to touch business decisions. Reference shareholders are those who hold a relevant amount of shares, which gives them sufficient participation to influence the company’s management. We want reference investors and long-term partnerships. Is Sabesp worth buying? In general, market analysts see Sabesp’s privatization with good eyes. There are two main factors: the possibility of strengthening the company’s cash for investments and a more benign environment for companies in the sector, after the approval of the Basic Sanitation Framework. The framework provides for mechanisms to expand, at rates close to 100%, the drinking water supply and sewage collection network throughout the country by 2033. It also establishes stimuli for the presence of the private sector, in an environment that was dominated by state-owned companies. In May, the Chamber of Deputies overturned devices modified by President Luiz Inácio Lula da Silva (PT) in the legal framework for basic sanitation. Lula’s decrees, which were eventually reversed, made points in the rules for granting and operating sewage collection and water treatment services more flexible in Brazilian cities. “In December 2022, we opted to remove Sabesp from the Top 5 Portfolio because we feared that any discussions about regulatory changes in the sanitation market could limit the company’s appreciation potential in the short term. After observing the consequences of these discussions, we are now more confident in the perspectives for the sanitation sector”, said a report by Itaú Unibanco at the time. Since then, and with prospects of Sabesp’s privatization since Tarcísio’s election, the shares have appreciated significantly. Still, some factors are on the table. According to Alberto Mattos de Souza, Specialist in Strategic Negotiations at PMMF Advogados, it is not just the value of the shares that should be taken into account when considering an investment in companies like Sabesp. The sanitation sector, along with the electricity and gas sectors are called public utility sectors and tend to be less subject to economic variations. Precisely because of this characteristic, they tend to be companies that pay regular dividends. Mattos de Souza also raises two variables to be analyzed. The first is whether there will be interference by the State in the company’s operation, and even in the privatization process. The next step will be approval by the regulatory body (Alesp), and, according to government expectations, the sale could be completed in the first half of 2024. The process could be delayed and questioned, as has been happening with the privatization of Eletrobras. “Sabesp would have reference shareholders, including the government of SP, maintaining a relevant position. The advantage of this difference is to avoid the questioning that is done about Eletrobras, where the government owns 45% of the shares, but votes with 10%. It will be discussed further the possibility of the state having a ‘golden share’ with veto power for some decisions”, says a report by Genial Investimentos. The second variable pointed out by Mattos de Souza is the definition of the company’s share price. “Pricing takes into account several assumptions that need to be well understood and evaluated by investors. In addition, understanding the particularities of the sector and adapting everything to the investor’s profile is essential for making the best decision”, he says. Carlos Honorato, a professor at the FIA ​​Business School, agrees that privatization processes generate a moment of insecurity, due to the “war of injunctions” and actions to contest the process in court, but that the deal can be beneficial for the investor. Privatized companies tend to have better management dynamics. This does not mean that Sabesp has not had this in recent years, but it tends to be more agile in what needs to be done. What does privatization change for customers? In theory, the financial contribution that would enter Sabesp with the privatization process could leverage investment projects and accelerate the delivery of sanitation projects. Critics, however, point out that privatized services can become more expensive over time, as companies need to respond to pressure from shareholders. Finance Minister Fernando Haddad (PT) was Tarcísio’s opponent in the campaign for the state government and, at the time, criticized the proposal, saying that the water bill would be increased. The Government of São Paulo, however, claims that privatization will bring: R$ 66 billion in investments to universalize access to water and sewage collected and treated within the 375 municipalities served by the company; a reduction in the company’s operating costs and sharing of productivity gains in the form of a tariff reduction; the anticipation of the universalization of sanitation from 2033 to 2029; the modernization of Sewage Treatment Stations (ETEs) and Water Treatment Stations (ETAs) throughout Sabesp’s coverage area; improved water treatment and reduced pollution of the Tietê River; the installation of two water desalination plants in the coastal municipalities of Guarujá and Ilhabela; the possibility of expansion so that Sabesp becomes a “platform of services with national and continental operations”. * In collaboration with Raphael Martins

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