Sabesp shares dropped 10% since São Paulo Governor João Doria used the word "capitalization" instead of "privatization" when talking about the future of the state-owned water utility, on August 19. Ibovespa stock index was stable in the same period.
Mr. Doria (Brazilian Social Democracy Party, PSDB), a pro-market politician, suggested in previous statements before being elected that he would work to privatize the company, which led investors to buy shares of Sabesp in recent years. Since he took over, the price has practically doubled.
"Among state-owned water utilities, Sabesp is the most likely to be privatized. We knew it wouldn't be easy. But after his statement, we decided to sell all shares we had," an asset manager says.
Questioned by the Securities and Exchange Commission of Brazil (CVM) after Mr. Doria's statement, Sabesp's controlling shareholder said there was nothing decided on the matter. The company declined to comment. Mr. Doria's press office referred to his last statement on the subject, made some days after the one about Sabesp: "I want to make it clear that we are a liberal, pro-market government."
In an event of the financial sector, Mr. Doria spoke about capitalizing Sabesp "in a first stage." This revived in the investors' minds the model proposed by the Geraldo Alckmin administration in São Paulo, which envisaged allowing investors to be part of a holding company while keeping control in the hands of the state. They are concerned because Sabesp has plans to expand operations outside São Paulo and are asking themselves who would want to partner with the government, considering the inefficiencies and constraints of a state-owned company that no longer delivers good returns. They also fear that the operating model - via consortiums or special-purpose partnerships, known as SPEs - may favor corruption as already seen in other state-owned companies.
"We are halfway with a company that may generate a lot of value based on its expertise and improve basic sanitation in Brazil. Or it may grossly destroy value for the state. Obviously, the market wants the asset to appreciate but this agenda is at a much higher level. It's really about investment, quality of life and cheaper bills," says a Sabesp shareholder. They argue that only in private hands Sabesp will have agility and efficiency to take part in bids in other states, which may generate value to the company. The most celebrated example is Equatorial Energia's work with...