(Bloomberg) -- Shares in Sabesp jumped, after Sao Paulo government unveiled a plan to kick off the company’s privatization by first selecting two strategic shareholders, before offering shares to the broader market.

Latin America’s largest water utility rose as much as 3.7% on Thursday, the biggest intraday gain in almost a month, before pairing gains. The unusual follow-on model has pleased investors, who think it might boost the company’s value. 

The deal will be split in two stages — first, the company will select two strategic investors, based on who offers the highest price. Those investors will then anchor a follow-on to the broader market, in which two separate books will be built and compete to garner the most bids. 

The pricing for that stage will follow the one initially offered by the strategic holder, and whoever pulls the largest volume will be chosen as the winner and gets to hold 15% of shares in the company.

The model “increases the likelihood of attracting a strategic investor,” Itau BBA analysts led by Marcelo Sa said in a report. “We believe this would be crucial in accelerating necessary changes to enhance the company’s efficiency.”

The novel model for the sale, outlined by Sao Paulo’s Secretary of Environment, Infrastructure and Logistics Natalia Resende, is based on the premise investors will choose the best company to run Sabesp rather than price alone.

“A strategic partner is an important value driver as it should increase the likelihood of a rapid cost reduction plan after privatization,” Vladimir Pinto, head of sanitation and energy at XP Inc., wrote in a report. 

Sao Paulo state seeks to have its current 50.3% stake in Sabesp diluted to as little as 18%, according to Resende, which would mean a divestment of a stake worth about $3.4 billion at current market prices. 

The final details on the process to privatize Cia. de Saneamento Basico do Estado de Sao Paulo, as the company is formally known, has been widely awaited by investors. Since the unveiling of the broad guidelines for sale at the end of July last year, shares have climbed about 40%. 

The conclusion of the process — expected by mid-year — would be a win for right-wing Sao Paulo Governor Tarcisio de Freitas, who has pledged to privatize companies to improve public services. 

Read More: Sao Paulo Government Eyes Selling 30% Stake in Water Utility 

Three board seats at the company will be held by the strategic shareholder, three by the government, and both will make the decision on the remaining three seats. 

Sao Paulo’s government will have some veto rights as the equity offering includes the issuance of a so-called golden share for the state. The government seeks to maintain a role within the company to ensure it meets an ambitious goal of universalizing services by 2033.

The decision on a two-stage process comes as Sao Paulo seeks to guarantee a strategic shareholder to anchor the transaction, who focuses on governance, said Resende. The details are also expected to improve transparency, preventing questions by the audit court. 

Shareholders will face a lock-up period until 2029, in which they won’t be able to sell shares. After that, the contract would be maintained as long as the strategic investor keeps at least a 10% stake in the company.

The state of São Paulo also limited the agreement with the strategic shareholder to 10 years, until 2034. After a decade, the terms will have to be revised, the secretary said at a press conference Wednesday night.

The company’s valuation is yet to be defined, as well as the new CEO, said Resende. The details of the offer, including the minimum price, will be released by June.

--With assistance from Vinícius Andrade.

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