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Mills Gets Xanadu Financing But Also Faces Ex-CEO Lawsuit

Just when things seemed darkest for Mills Corp., the company made a stunning announcement that it had reached an agreement with Colony Capital Acquisitions and Kan Am USA Management to help fund the Meadowlands Xanadu project. Colony will provide up to $500 million in equity and $1.5 billion in debt to finance the $2 billion mega-project. Many analysts believe the move opens the door for Mills to sell the company--something that uncertainty hanging over Xanadu was preventing.

In typical Mills fashion, however, it couldn’t reveal good news without some bad news following close behind. Mills founder and former CEO Herbert S. Miller is suing the company. The suit alleges the company “failed to comply with their contractual duties,” according to the clerks office at Delaware Chancery Court, where Miller filed the suit March 31. The clerk said the suit is “still active.”

According to a report in the Wall St. Journal, Miller is charging that Mills’ accounting problems have cost him millions of dollars and alleges that Mills management intentional disregarded warnings from its auditor Ernst & young dating as far back as February 2002.

Miller founded Mills Corp. after creating the Mills concept with the Potomac Mills property near Washington. Mills Corp. became a public REIT in 1994. He stepped down as CEO in 1995 and left the company’s board of directors in 1997. He is now president of Washington D.C.-based Western Development Corp. Miller is out of the country and could not be reached for comment.

Still, the suit has not entirely dampened shareholders. The company’s stock jumped as high $19.80 per share after the Xanadu news broke—its highest level since it restating earnings and values of some of its assets on August 10. As of mid-day Thursday, it was trading $18.20 per share. And, though Mills still has troubles, it eases some of the pressure and makes a sale of the company more likely.

“We see Mills as more ‘saleable’ given the disposition of the non-U.S. assets and the removal of the risk of a further write-down on Meadowlands beyond the company’s current $485 million investment,” wrote Banc of America Securities analyst Ross Nussbaum. “However, there is a risk to valuation if cap rates rise, especially given the company’s significant leverage.”

“In addition, if Mills doesn’t get sold and elects to operate as a going concern, a dilutive equity infusion remains a likelihood and a discount to NAV is probable.”

Nussbaum raised the company’s NAV estimate to $17-21 from $13-19.

Morningstar analyst Ryan Dobratz actually reduced Mills’ fair value estimate from $46 per share to $39 per share as a result of the new announcement. He cited the company’s plan to issue 4.5 million common shares to back the financing transaction as the reason for the decrease.
“We had previously written down Mills’ investment in the Xanadu project, but since the cost associated with unloading the project and all future funding obligations exceeded our expectations, we are inclined to reduce our fair value estimate by an additional $6 per share,” he wrote.

This latest spate of news caps off an extremely up-and-down two weeks—even by Mills’ standards. Since August 10, the company upped its projected price tag on Xanadu from $1.2 billion to $2 billion, reduced the book value of other assets by $315 million, sold several properties to Ivanhoe Cambridge for a combined $981 million and then disclosed in an SEC filing that several top executives had left the company. The combined carnage left Mills shares at 52-week low of $12.27—a 78 percent drop from its high last September, just weeks before Mills’ troubles started

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