Westfield’s Brazilian shopping cloud

Westfield’s shopping centre venture in Rio may have hit partnership turbulence.

Summary: Westfield outlaid $440 million in 2011 for a half share in a Brazilian shopping centre venture. There are now concerns the group is having issues with its venture partner.
Key take-out: There are question marks over the future of the Westfield Almeida Junior Shopping Centres joint venture.
Key beneficiaries: General investors. Category: Portfolio management.

It is known as “execution risk”.

Businesses strive for growth, and achieving that often means going out on a limb either through an acquisition or an expansion.

Cost blowouts among our big miners and energy companies, on the North West Shelf and the three competing LNG plants on Curtis Island near Townsville, have captured headlines for months.

This week Rio Tinto was in the news for the very same reason. Another $14 billion in write-downs, most of it related to the ill-fated $US38 billion purchase of Alcan in 2007 but $3 billion on the more recent takeover of Riversdale Resources, with its proposed coal operation in Mozambique.

Now there is speculation that all is not going well with Westfield’s new joint venture in Brazil.

Formed in November 2011 with local mall developer, Almeida Junior, the global mall developer outlaid $440 million for a half share of the privately run company, owned and operated by the founder Jaimes Almeida Junior.

It was the first major push offshore since the financial crisis smacked property developers worldwide and the first international expansion since the company moved into the UK in 2000, with Brazil considered to be one of the miracle BRIC economies at the time, and with low mall growth in a rapidly emerging market.

Promoted as a “strong cultural fit” for Westfield, the Almeida Junior joint venture apparently now is beset with tensions.

A Westfield spokesperson this week declined to comment to Eureka Report on the Brazil situation, saying only that the company “had issued no statements”.

The Brazil joint venture is estimated to provide just $17 million out of almost $2 billion in net property income next year. So difficulties in the new business partnership could hardly be considered to provide a material impact on earnings. As a result, the company would not be obliged to make an announcement under continuous disclosure rules.

In addition, the five shopping malls – three operating and two under construction – will be providing income to the business, so it is possible there will be no impact on earnings.

But serious question marks remain over the future of the Westfield Almeida Junior Shopping Centres joint venture and hence Westfield’s ability to generate a return on its $440 million investment unless it can iron out the problems.

With a 50% stake, and holding the title of chief executive, Jaimes Almeida Junior has a firm grip on the operations while Westfield has equal representation on the board, including the chair, along with several executives in senior positions.

Eureka Report understands that Mr Almeida Junior, a determined man with a vision all his own, believes he knows best how to operate in Brazil.

While it refuses to discuss Brazil, it is worth noting that Westfield made much of its recent joint venture announcement in London with former rival Hammerson to develop the £1 billion Croydon town redevelopment in London.

The deal adds $770 million to Westfield’s $11 billion development pipeline and could yield a profit of up between £80 million and £165 million.

Westfield’s incursion into Brazil, to its credit, was deliberately designed to be low key, a “measured entry” as it described 18 months ago. Having tentatively dipped its toe into the South American market, it may decide the water is just a little too warm for its liking.

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