Equatorial did not hand the gold to Sabesp and Copasa shareholders. It gave them a simpler way to buy it.
Since listing in March 2006, Equatorial Energia’s shares have delivered an annualized return of 16%, according to XP. Compounded over slightly more than 20 years, that would have increased an investment roughly twentyfold: R$10,000 invested at the IPO would now be worth approximately R$203,000. Few Brazilian companies have built a comparable track record.
The formula was consistent: acquire troubled assets, improve operations and reinvest the proceeds. Equatorial began in the late 1990s as the turnaround story of a distressed state-owned power distributor. It has since become a diversified infrastructure group spanning electricity distribution, transmission, renewable generation and water and sanitation.
Success, however, has created a paradox, according to XP. As the portfolio has grown, it has become harder to identify which assets will drive the group’s future value. Every acquisition may improve economic returns, but it also adds another regulatory framework, capital structure and set of risks to the valuation of EQTL3.
Sabesp and Copasa offer the opposite proposition. Their investment cases are more concentrated: privatization, higher investment, operational efficiency, earnings growth and dividends. Investors can buy directly into the transformation they expect Equatorial to deliver without having to assess the rest of the conglomerate.
Equatorial invested approximately R$6.9 billion to acquire a 15% stake in Sabesp and become its anchor shareholder. In Copasa, it paid R$49.03 per share, or around R$5.59 billion, for a 30% stake. In less than two years, it committed roughly R$12.5 billion to Brazil’s two largest publicly traded water and sanitation companies.
XP estimates that Copasa offers a real internal rate of return of 12.1%, average annual earnings-per-share growth of 26% between 2026 and 2030, and an average dividend yield of 13%. For Sabesp, it calculates a real IRR of 10.1% and annual EPS growth of 23% over the same period. These are investment cases that portfolio managers can grasp relatively easily.
Equatorial, despite being responsible for much of the confidence surrounding those transformations, trades at an implied real IRR of 12.7%. Once its Sabesp and Copasa stakes are removed from the valuation, the return required by the market for the rest of the group rises to 14%.
That discount is particularly striking given Equatorial’s 16% annualized return since its IPO. Investors do not appear to doubt the company’s ability to acquire and operate businesses. They are demanding a higher return to absorb the complexity of the portfolio — and to trust that future investments can have an impact comparable to the acquisitions that built the group.
Scale has also changed the equation. Turning around a regional electricity distributor could transform Equatorial two decades ago. Today, a transaction must involve billions of reais to make a meaningful difference to a much larger company. The risks increase while the incremental value created by each acquisition becomes less visible.
There is also more competition for investor capital. XP notes that newer investment stories — including Sabesp, Copel, Axia and now Copasa — are competing for the same funds that once treated EQTL3 as a core holding in the Brazilian utilities sector. Equatorial has helped create assets attractive enough to compete with its own shares.
That does not mean the investments were poor decisions. Equatorial remains exposed to the appreciation of Sabesp and Copasa and will capture part of their operational gains, dividends and earnings growth. The problem is that creating economic value and having that value recognized by the stock market are not the same thing.
Copasa and Sabesp offer clarity. Equatorial offers confidence in the capital allocator. After delivering 16% a year for two decades, its challenge is to prevent the value of its new investments from being swallowed by a conglomerate discount.
Equatorial did not give away its Midas touch. It simply gave the market a more straightforward way to buy it.
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