The secondary public offering of shares issued last July by Brazilian water and sanitation company Sabesp was a transaction brimming with superlatives.
The R$14.5 billion ($2.7 billion) placement was the largest ever water and sanitation share offering anywhere in the world and the biggest by any company in the Americas in 2024, according to BTG Pactual, with an orderbook that was 30 times oversubscribed for the actual market offering.
The deal, which wins the award for Equity Follow-On of the Year, marked the conclusion of the privatization of Brazil’s largest state-owned water and sanitation company; it was also the end of a process that not only had to contend with the whims of the market, but with political and regulatory challenges as well. Upon closing, São Paulo state was left with 18% of the company, having reduced its holding from just over 50%.
A public offering was not the only option the São Paulo government considered, however. Karla Bertocco Trindade, chairman of Sabesp’s board, says was initially some discussion of splitting the firm’s business into different blocks for tender – an approach that might have brought large sums of cash short-term to state coffers. But in the end, shareholders decided that selling the business in its entirety would yield the most favorable long-term outcome for the business.
“We did a study along with the World Bank and concluded that, once Sabesp was privatized, it would be possible to anticipate the universalization of services from 2033 to 2029, while bringing many more people into the fold,” she says.
It was far from easy, though. For a start, the 376 municipalities covered by Sabesp’s services would have to agree with the proposal and change their contracts with the company accordingly. The deal had to be structured to meet the requirements of the securities market regulators, and there was pressure to do it all before the municipal elections of October 2024 – or risk having to restart negotiations with all the local governments involved.
Bertocco says that the São Paulo state government embraced the challenge and the whole process was concluded within a record eight months. Even then, when Sabesp was finally ready to launch the offer in July, Brazil’s equity markets had begun to flag, although Bertocco points out that regulatory concerns were more pressing for investors than the state of the equity market.
“Once we managed to upgrade the regulatory framework for the deal, we started to see a lot of appetite from large investors, even though the market as a whole was in a poor mood,” Bertocco says.
Investors ultimately showed tremendous interest in the asset, she notes, which was already well-known as a domestically-listed firm whose stock had delivered annual returns of over 20% in recent years. Furthermore, the deal provided an opportunity for both local and international investors to get exposure to Brazil’s much coveted water and sanitation sector.
A key decision before launching the transaction was to identify a reference investor that would buy a large share of the stocks on offer while also guaranteeing enough capex to meet Sabesp’s ambitious expansion plans. Bertocco says deciding whether to pursue a reference investor-led approach was “the biggest challenge” in the process.
The offering was structured in a way that prospective reference investors would be able to bid for a 15% stake in Sabesp, and the winning bidder would have to commit to a lock-up until 2029. In the end, the successful bidder was Brazilian energy company Equatorial Energia which purchased 15% of Sabesp’s share capital; the price negotiated with the company, R$67 per share, anchored the follow-on deal. Another 17% of shares were sold in the open market.
Record demand for the shares reached in excess of US$32 billion, with over 300 institutional orders received in the bookbuilding and with final allocation split 50/50 between local and international names.
Bertocco says that shares might traded higher, but the priority was to guarantee that Sabesp would meet its investment plans. With the support of Equatorial, the company doubled its projected capex for the next five-year period.
“The São Paulo state might have earned more money otherwise, but the truth is that the 18% share of Sabesp that it owns now is already worth more than the 70% that it owned before the privatization process,” Bertocco concludes.
Underwriter’s Counsel: Pinheiro Guimarães; White & Case
Counsel to the Cornerstone Investor: Mattos Filho
Issuer’s Financial Advisor: Laplace Finanças
Advisor to the State of São Paulo: IFC
Counsel to the State of São Paulo: Lobo de Rizzo
Sabesp’s Counsel: Clifford Chance; Lefosse; Cescon Barrrieu
Global Coordinator: BofA Securities; BTG Pactual; Citi; Itaú BBA; UBS
Counsel to IFC: Pinheiro Neto
Independent Auditor: BDO; Grant Thornton
Joint bookrunner: Bradesco BBI; Goldman Sachs; JP Morgan; Morgan Stanley; Safra; Santander; XP Investimentos
Acquirer: Equatorial Energia
Advisor to Equatorial: Bradesco BBI
All supporting financial institutions and law firms were transmitted to LatinFinance by the award category winners. For updates please email awards@latinfinance.com