Largest Water Utility in Latin America Prepares for Privatization

Sao Paulo’s Sabesp has a “potential window” for the equity offering starting in mid-May

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Bloomberg — Latin America’s largest water utility is getting ready for a public share sale next year that would see Sao Paulo’s state government give up control, according to the company’s chief executive officer.

Cia. de Saneamento Basico do Estado de Sao Paulo, known as Sabesp, has a “potential window” for the equity offering starting in mid-May, after Sabesp publishes its first-quarter financial results, and running until mid-August, Andre Salcedo said in an interview.

Salcedo, who took the reins in January, has launched a cost-cutting push that includes shedding about 15% of Sabesp’s staff and lowering energy expenses. The company is also working to reverse the post-pandemic surge in delinquency rates.

By selling the state’s controlling stake, the utility hopes to lure some key investors “with a long-term vision, knowledge of the infrastructure sector’s dynamics and the know-how of Brazil’s regulatory environment,” Salcedo said Thursday at Bloomberg’s Sao Paulo office.

Sabesp’s move will be a key test of privatization in Latin America’s biggest economy. President Luiz Inacio Lula da Silva vowed, during last year’s election campaign to unseat free-market champion Jair Bolsonaro, to halt a push to relinquish state control of national oil giant Petroleo Brasileiro SA.

Rio de Janeiro’s power utility Light SA — which was privatized in the 1990s — is working on a plan to exit bankruptcy protection, after struggling with delinquent payments and losing a quarter of its grid load to theft. In the past two years, both federal and state governments moved to sell controlling stakes in firms from utility Companhia Paranaense de Energia to fuel distributor Vibra Energia SA and power provider Eletrobras.

The state of Sao Paulo, Brazil’s richest, unveiled the broad guidelines of a Sabesp privatization at the end of July, and shares have climbed 29% in the past year on expectations of a potential sale.

Governor Tarcisio de Freitas — a Bolsonaro ally — is currently negotiating with municipalities, trying to gather support for a key vote on the proposal in the legislative assembly expected in coming months. Sabesp has a market value of about 42 billion reais ($8.5 billion) and the state owns a 50.3% stake.

Before any share sale can happen, the government needs to get buy-in on a standard new contract for all 376 municipalities that Sabesp serves. Some cities have already demanded a tariff reduction and more investment.

“Although we view timing as the key challenge here, given that the next municipal elections in Brazil will take place in the second half of 2024, we believe that the state governor has enough political support to move forward with this agenda,” Banco Itau BBA analysts led by Marcelo Sa said in a report to investors.

Salcedo said it’s not clear yet whether the company would also raise money as part of the stock offering. He isn’t against the issuance of a so-called golden share for Sao Paulo’s government, but he warned a powerful one that includes veto rights on economic issues such as dividend distribution would “generate noise” for investors and harm the deal.

In order to prepare for privatization, Salcedo launched a voluntary redundancy program. At its conclusion, 1,862 out of a total of 12,200 Sabesp employees accepted exit packages, which will help the company lower payroll expenses that currently top 3 billion reais.

Another initiative is trying to shrink the 1.5 billion reais the utility now spends on energy. Sabesp will increase the amount of power it purchases at unregulated rates, sign new contracts at lower prices and build a new solar plant slated to begin operations in 2026.

Salcedo is also trying to show investors he’s tackling a crisis that’s seen delinquency rates jump to nearly 4%, from less than 1% before Covid. He’s changing the way payments are collected, warning those behind on their bills about possible service cuts and offering promotions to renegotiate delayed payments. He has also made management changes at the company, including naming a new chief financial officer.

“There are a lot of things that we won’t be able to complete until privatization — for example, improving technological infrastructure,” he said. “We are doing our homework, as if it were a long-term restructuring project,” he said.

The executive expects the share sale will attract substantial interest from both domestic and foreign investors, since Sabesp’s returns — at about 8% plus inflation — outpace those of other utility companies.

It’s also “an ESG case, with a huge environmental agenda in dealing with sewage waste,” Salcedo said. “In the social area, the impacts are even bigger. There is no activity in the world that generates more social impact than sanitation.”

--With assistance from Vanessa Dezem.

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