Why Brazil's Aegea is looking for more sanitation investment opportunities

Brazil's biggest private sector sanitation firm, Aegea Saneamento e Participações, has pursued an aggressive expansion in recent quarters to consolidate its leadership position.

Earlier this month, Aegea led a consortium – with local investment firms Perfin and Kinea - that was the sole bidder in the auction for Rio Grande do Sul state water utility Corsan, offering 4.15bn reais (US$800mn).

In this interview, CFO André Pires speaks with BNamericas about the company's financial strategy to maintain a strong balance sheet even after a series of major deals, the appetite for new acquisitions, and the possibility of regulatory changes in the sector.

BNamericas: When will the consortium led by Aegea assume control of Corsan and what’s the investment plan for the company's operations in Rio Grande do Sul?

Pires: The Corsan contract is a classic privatization operation, where the Rio Grande do Sul state government sold 100% of the shares.

This process still depends on some regulatory approvals, including approval from CADE [Brazil's antitrust authority].

I believe that by mid-March 2023 we will have all these approvals and be able to take the control of the firm.

The necessary investments in Corsan, which are included in the tender notice, amount to 13bn reais by 2033, since the company has a low service coverage in the sewage area.

Of these 13bn reais, it’s common for 80% of the investments to be made in the first six or seven years of the contract.

BNamericas: The acquisition of Corsan cost 4.15bn reais for the consortium led by Aegea. How will this be financed?

Pires: We created a specific holding company for this acquisition, which is not consolidated on Aegea's balance sheet. This holding is composed of 70% debt and 30% equity of the companies that make up the consortium that bought Corsan.

Regarding the debt part, this refers to a bridge loan with a group of eight banks that we have already signed a commitment with.

That was the way to make Aegea's balance sheet cleaner, lighter.

BNamericas: What will Aegea's financing needs be in 2023?

Pires: We recently obtained financing from [federal development bank] BNDES that made our entire funding structure feasible for our concession in Rio de Janeiro state, which was an operation worth 19.3bn reais.

Looking to 2023 and 2024, at some point we’re going to access the capital market, mainly the local debt market, to try to extend our debt profile, which currently has an average term of over five years.

As we’re a company that operates in a capital-intensive sector, it’s always important to work to extend the debt [profile].

For example, with our financing operation through BNDES in Rio de Janeiro, the average term of that funding is around 20 years.

BNamericas: Some state governments have expressed an interest in privatizing their respective sanitation companies, such as Sabesp, Copasa and Sanepar. Would Aegea be interested in these opportunities?

Pires: We’re always interested since our main objective as a company is to provide a life with dignity for people, by increasing sanitation coverage in the country.

For this reason, in order to always remain prepared for potential new acquisitions, we’re constantly working to maintain an adequate capital structure.

BNamericas: In the sanitation area, do you expect a 2023 with more opportunities in terms of privatizations, concessions and PPPs?

Pires: It's hard to answer that now, I think it's only during the first quarter of 2023 that we'll have greater visibility on this.

But I would say that there are several opportunities, for example Porto Alegre [Rio Grande do Sul’s capital], which is not served by Corsan, is in the middle of a public consultation regarding a concession and we would certainly be interested in participating in this contest.

But we’re open to all opportunities since we operate a lot through concessions and PPPs.

BNamericas: There are some fears of a potential change in sanitation sector regulations due to the upcoming change in the federal government. How do you view this possibility?

Pires: We remain excited about the opportunities in the sector. Around 50% of the population in Brazil, some 100mn people, are without adequate access to sewage and this requires private sector investment to improve.

I don't believe this journey we're seeing is going to change. Of course, we’re always evaluating the scenario, but I don't expect [regulatory] setbacks.

BNamericas: When does Aegea plan to go for an IPO?

Pires: An IPO is one of the options as a source of capital for our expansion and it’s something that we’re always discussing within the company.

But we don't have a set deadline.