Besides Copel and Sabesp, market see moves toward new share offerings despite political and regulatory barriers
06/27/2023
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Karla Bertocco — Foto: Nilani Goettems/Valor
A group of state-owned companies has begun to move toward privatization through secondary offerings following the example of Eletrobras, which sold R$33 billion in shares in one of Brazil’s largest transactions last year. Financial players expect these companies to help stimulate the market after a sluggish first semester amid high interest rates.
Among the most important offerings expected for this year is Copel, the Paraná-based power utility that plans to launch an offering of up to R$5 billion. Another bet is Sabesp, whose privatization was promised by Governor Tarcísio de Freitas during the campaign. He is expected to appoint soon a syndicate of banks to carry out the offering.
Copel plans to make its offering in July, according to sources — officially, the company has said the deadline is October. Until then, the company must obtain the approval of the state’s Court of Accounts (TCE-PR), as well as the confirmation of the Federal Court of Accounts (TCU) for the renewal of the concession of its three hydroelectric plants for R$3.7 billion.
In addition, the Paraná government will have to face political opposition in the state. Currently, opposition lawmakers in the Legislative Assembly are trying to collect signatures to start an investigative parliamentary committee (CPI) to analyze the process, as well as the existence of a R$3.2 billion debt arising from an arbitration award against the company – which Copel denies. The state government declined to comment on the matter.
As for São Paulo-based Sabesp, the race is on to launch an offering by July 2024, according to the schedule agreed with the International Finance Corporation (IFC), which is conducting the studies. The idea is to complete the privatization before the municipal elections in the state. However, if the schedule is not feasible, there is the prospect of a second window starting in 2025.
According to investment fund managers who follow the sector, the privatization of Sabesp is an old expectation in the market, and there were already signs of privatization under former Governor Geraldo Alckmin, who is now vice president.
The move of the state governments comes in a year that has been weaker for capital market activity in Brazil, but which is starting to gain traction with the expectation of the beginning of an interest rate cut cycle, due to recent more positive inflation data and the fiscal framework. In the last few weeks, the stock market has been gaining ground with improved investor expectations, which has already led companies to get their financing plans off the drawing board, which is likely to stimulate these state-owned companies, many of which have mature plans.
In general, the example would be BR Distribuidora, now Vibra, which made its IPO in 2017, selling 25% of its shares. In the following years, three other transactions were carried out.
The state-owned sanitation utilities are one of the main bets of the financial market to tap the stock market in search of privatization, something that can, theoretically, take more than one stock offer. However, regulatory processes and political opposition are hampering progress. In addition, because of uncertainties surrounding the new regulatory framework for sanitation, states are likely to adopt a wait-and-see approach, sources say.
The main candidate to follow this path is Minas Gerais-based Copasa, which is already listed. The company’s privatization model is being discussed internally by the government. The study of possible models — share offering, direct sale, or sliced sale — was already carried out by the Brazilian Development Bank (BNDES) in the previous administration. However, any model will depend on an amendment to Minas Gerais Constitution (which currently requires a plebiscite in the event of a sale of control), in addition to an authorizing law.
In addition, the Minas Gerais government would also have to negotiate the privatization with the more than 600 cities in which the company operates, a task that is already considered challenging in the case of Sabesp but is even more complex in the case of Copasa. Given these obstacles, people familiar with the case say this privatization is unlikely to materialize before the municipal elections of 2024. Sought for comment, the government said that “the process will be carried out with responsibility, having in mind public interest.”
The market is also considering the possibility of other state-owned companies in the sector joining the model. One company that filed for an IPO a few years ago was Goiás-based Saneago, but it was unable to proceed due to market volatility. In this case, the plan was to go public, but not to privatize it — the state keep a stake of 51%. In a note, the company said that “even though it is structured and prepared” for an offering, “the company understands that the moment is not favorable.”
Another potential candidate is Sanepar, which is already listed on the stock exchange and has carried out follow-ons to help the Paraná government’s accounts. Asked about the plan, the Paraná government said that “there is no process underway in the state.”
Last month, a possible privatization of Pernambuco-based Compesa was also discussed after the state government reached an agreement with BNDES to study the matter. When questioned, the state said it had commissioned studies “on concession models.” BNDES said as well that the contract “does not include the privatization or sale of Compesa shares as a possible model.”
According to investment bankers consulted by Valor, the states have put the possibility of privatization through the capital market on the table, because they see in this alternative a greater transparency in the process and less chance of questioning by the audit courts. A source close to the matter said this could be an alternative more easily explored by companies already listed, also because investors are growing more selective amid a more limited market for share offerings.
In addition, the share offer model has the advantage of making it easier to attract investors, since a sale of the company as a whole would require a buyer with a lot of financial strength — which will not be easy in the current scenario, where interest rates are still high and the main operators are already indebted, says a senior executive in the sanitation sector. The privatization auction of Corsan in December 2022, for example, had only one interested party: a consortium formed by Aegea, Perfin, and Kinea.
According to Karla Bertocco, a partner at Jive Investments, privatization through public offering has advantages and disadvantages. “It depends on the objective. If the idea is to improve operations, it is more difficult in this follow-on model, where the existing management ends up being favored and there is no control over the investor’s profile, whether they will attract someone with operational experience. At the same time, it is a faster and more transparent process, with a lower average ticket.”
However, the preference for this privatization model still depends on the outcome of the Eletrobras privatization, which is being disputed. In the most recent questioning, the Federal Attorney General’s Office (AGU) filed a direct action of unconstitutionality against the provision in the law that authorized the privatization of Eletrobras and established a ceiling of 10% of the voting capital for any shareholder of the company.
According to Ms. Bertocco, however, the market does not believe that the questioning will move forward in court.
*Por Fernanda Guimarães, Taís Hirata — São Paulo
Source: Valor International