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Beating The Clock

Mills Corp.'s decision to accept a $7.5 billion buyout offer from Toronto-based Brookfield Asset Management Inc., including cash and assumption of debt, came as the March 31 deadline to pay back a $1.06 billion mortgage loan from lenders represented by Goldman Sachs Mortgage Co. crept closer.

The proposed deal values Mills at $21 per share — below what some analysts expected the REIT to fetch. But Brookfield's bid may not be the last word in the saga. As of press time, that deal was still on. But Israel-based Gazit-Globe Ltd., which has been heavily courting Mills since October, has upped its offer to recapitalize Mills for a second time, now to $22 per share.

Gazit-Globe, which owns about 9 percent of Mills stock, originally offered Mills $1.2 billion in October, proposing to buy Mills stock and extend the firm new lines of credit. Then — the day before the Brookfield deal was announced — Gazit upped its offer to $21 per share, amounting to $1.8 billion in acquiring stock and new debt, including an offer to refinance the Goldman Sachs loan. Another shareholder, Farallon Partners, which holds 10.9 percent of all Mills shares — offered to buy $499 million of new Mills stock, offering $20 per share.

Either of the offers could have helped to solve Mills most pressing problem — the Goldman loan. Farallon's equity was to have been augmented with CMBS proceeds to pay down the loan, while a Gazit-Global share purchase would have paid down the debt and been coupled with a refinancing of the remaining balance with the Royal Bank of Canada.

“We are disappointed that the Mills Corp. has chosen to accept what we believe is an inferior proposal,” Gazit stated in a press release. “We firmly believe that the best interests of the shareholders have not been served by this decision.”

Farallon executives declined to comment on news of Mills' agreement with Brookfield.

In light of Gazit's increased offer, the purchase price could go up to $23 per share but isn't likely to go much higher, according to Richard Moore, lead analyst at RBC Capital Markets.

“It's interesting that Brookfield is the buyer, as opposed to one of the big mall companies,” Moore says. “There's a possibility that Simon [Property Group] comes in above these guys.”

RBC Capital has maintained a $26 target share price on Mills since August, based on the value of the company's properties in anticipation of an eventual sale.

Under terms of the agreement, Brookfield will purchase all outstanding common stock of Mills and common units of the Mills Limited Partnership, plus assumed debt and preferred stock. Mills will merge into a newly formed Brookfield subsidiary. As part of the purchase agreement, Brookfield has agreed to assume the Goldman loan and provide Mills with a $500 million revolving line of credit until the acquisition closes, which should occur in the second half of 2007.

“We are pleased to be able to work with the Mills Corp. to move beyond the recent issues it has encountered,” says Bruce Flatt, managing partner and CEO of Brookfield. “We look forward to working with management of Mills in getting back to business and focusing on service excellence to attract premium tenants to this high-quality retail portfolio.” Brookfield is a global asset manager with more than $50 billion in assets under management.

Goldman's loan was originally set to mature on Dec. 31, but the parties agreed to an extension until the end of the first quarter. With the Brookfield agreement in hand, the loan has been extended to 2008. Just before announcing the deal, Mills completed a lengthy internal investigation into its accounting irregularities, stating it will cut shareholder equity by as much as $352 million.

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