(Bloomberg) -- A 50% stock rally over the past year at Sabesp, Latin America’s largest water utility, is giving a potential strategic investor some jitters.

The Sao Paulo water and sewer company is expected to hold an initial auction in July in which the state government will select two anchor investors before a broader share offering. Aegea Saneamento e Participacoes SA is considering making a bid for one of the top spots but only under the right conditions, according to its top executive.

“Sabesp’s shares rose much higher than we expected. It’s almost at a stimulation limit,” Aegea Chief Executive Officer Radames Casseb said in an interview. “This price would be appropriate for a company that I would operate with full rights.”

Sao Paulo’s government, which currently holds a controlling 50.3% of Sabesp, is looking to keep around 20% of the company in state hands, with the top strategic investor getting 15%. 

Casseb said it would be important for Sao Paulo’s governor to offer the anchor investor a guarantee that they would have input on major decisions like sanitation plans, river cleanup and increasing water access to vulnerable communities.

Aegea is counting on the support of its key shareholders, which include Itausa and Singapore sovereign wealth fund GIC, in its bid and is partnering with Brazilian funds Kinea Investimentos and Perfin Investimentos. The company has hired Itau Unibanco Holding and Banco Bradesco as financial advisers on the potential deal, Casseb said.

At current prices, Aegea would need to spend about 8.1 billion reais ($1.6 billion) to acquire a 15% stake, so Casseb is heading to New York this week to drum up more support. If it’s not the winner, he said his company has no interest in a minority stake. 

The CEO wants to know how much sway the anchor investor will have on investment decisions and asset allocation. He said he’s keenly awaiting the government’s plan for shareholder rights, which should be published before the follow-on prospectus. 

“My fear here is approving a budget and having to discuss increasing investments from 4 billion reais to 10 billion reais over several meetings,” Casseb said. He cited the risk of entering the auction for the anchor share “with a super noble objective without having the rights for this to happen.”

Sabesp’s rally has been driven by the privatization plan. Equity analysts believe its shares could rise to 96 reais, a potential increase of 22% from current levels, with Itau and JPMorgan projecting they could even reach 120 reais. 

“We are deeply studying the company as we do for each project,” Casseb said. “On the business side it makes sense to join the offer. The debate now is about return and risk.”

--With assistance from Giovanna Serafim.

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