The first step is to choose potential primary shareholders

04/18/2024

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Natalia Resende — Foto: Silvia Costanti/Valor

The São Paulo state government released on Wednesday (17) information on the model for the privatization of water utility Sabesp. However, some points are yet to be defined. The plan is that the offer will occur in two stages. First, a competitive process will be carried out between groups with the potential to be the primary shareholder, holding 15% of the company and having greater control over management. At this stage, the two groups offering the highest prices will be selected. In the following stage—which will be part of the same process, but not necessarily will take place on the same day—there will be a dispute between the two groups previously selected. In this stage, other investors will choose the winner.

In this second stage, two book-building processes will be carried out with the broad market, meaning that investment intentions will be collected for each of the potential primary shareholders. In the dispute, the bookbuilding with the highest total value will be the winner. However, detailed rules for this selection are yet to be defined as there should be a combination of criteria between price and volume. If there is a potential primary shareholder who, in the market’s view, is more qualified to lead the company, this group will have an advantage in the competition.

More detailed information about the model of the offer will be disclosed in the coming weeks. It remains unclear, for example, whether the price paid by the primary shareholder will be equal to the value of shares acquired by the broader market. According to people familiar with the matter, this possibility is currently being studied, but it hinges on legal and regulatory analyses.

The Sabesp privatization model was unveiled to the press by Natalia Resende, São Paulo’s secretary of environment, infrastructure, and logistics.

The concept of having a primary shareholder was introduced by the state government to ensure that the sanitation company will have a partner with a longer-term vision and the capacity to carry out the necessary changes in the company’s management following the privatization.

This primary shareholder should comply with a lock-up period of up to five years, in which the acquired shares cannot be sold and the universalization of services must be implemented.

After that period, the primary shareholder will be allowed to sell the shares but the government included a rule to try to keep the group in the company. If this partner reduces its stake to less than 10%, the shareholders’ agreement—to be signed with the government to set the governance rules—will be terminated. The terms of the shareholders’ agreement will be finalized before the offering.

The issue of governance involving future partners is regarded as crucial for potential primary shareholders, who want to learn what type of control mechanisms they will have. Several groups are mentioned as potential primary shareholders, including Equatorial, Aegea, Cosan, Votorantim, Veolia, and IG4 Capital, among others. However, they await the definition of governance, which will be central to the decision.

On Wednesday (17), an important step was taken in the process. The São Paulo City Council approved, in the first vote, the bill for the company’s privatization. The proposal allows the maintenance of the municipal government’s contract with the company after privatization. The project had 36 votes in favor and 18 against in the first vote. The City Council will hold public hearings until the end of the month, before the second and final vote. The date for the final vote has not been scheduled.

*Por Taís Hirata, Cristiane Agostine — São Paulo

Source: Valor International

https://valorinternational.globo.com/