All last summer, Mills Corp. languished, unable to attract a buyer to pull the troubled mall developer from the edge of bankruptcy. Finally, in January, by which time the company faced an urgent need for working capital, it nailed down a $7.5 billion deal with Canada’s Brookfield Asset Management.
On Monday, that deal was trumped by a joint bid by Simon Property Group and hedge fund Farallon Capital Management and, analysts say, that could flesh out more suitors. Suddenly, the Chevy Chase, Md.-base Mills looks like a hot property—at least relatively. Morningstar analyst Akash Dave and RBC Capital Markets’ Richard Moore both say that Mills might fetch twice the $7 billion Simon/Farallon offer (the deal includes $4.9 billion in assumed debt, vs. $5.1 billion suggested by Brookfield’s offer).
Dave expects that other mall operators will try to beat Simon, the nation’s number one mall owner, to the Mills portfolio, which currently consists of 19 Mills Landmark Centers and 20 Twenty-First Century Retail and Entertainment Centers. He also expects Brookfield, which is using the Mills deal to catapult into the North American retail sector, to counter with a sweetened bid of its own.
Bank of America analyst Ross Nussbaum says that if Simon succeeds, it will most likely hold on to the outlet and regional mall properties and sell off Mills’ weaker assets. Many analysts consider the Mill’s retail and entertainment centers, like the 1.7-million-square-foot Franklin Mills in Philadelphia and the 1.5- million-square-foot Cincinnati Mills in Cincinnati, Ohio, to be difficult to manage, and therefore among the REIT’s more undesirable properties. In August of last year, Mills was able to get rid of one of its biggest problems – the to-be-developed Xanadu Meadowlands entertainments complex in Bergen County, N.J. by signing a $2 billion financing deal with Colony Capital Acquisitions and Kan Am USA Management.
The Brookfield deal emerged after Farallon and Gazit-Globe Ltd., an Israel-based REIT, which owns 9 percent of Mills stock, had both offered re-capitalization plans. Mills management chose instead Brookfield’s buyout offer. Farallon, which owns 10.9 percent of Mills’ common shares, offered to buy $499 million of new Mills’ stock, at a price of $20 per share. Gazit-Globe offered $1.2 billion or $21 per share, but later increased it to $22 per share, including refinancing of a $1.06 billion Goldman Sachs loan. Gazit-Globe declined to comment on the latest offer or about its plans to re-enter the bidding.
According to the terms of Mills’ agreement with Brookfield, the REIT was set to receive $1.35 billion for all of its outstanding common stock and common units of the Mills Limited Partnership at the price of $21 per share, plus assumed debt worth $5.1 billion. The agreement was scheduled to close in the second quarter of 2007.
If a bidding contest does unfold, the partnership of Simon and Farallon would be difficult to overcome, because of their combined financial prowess, says Moore.
In a letter from Simon and Farallon to the Mills board today, the two firms propose a $24 per share cash tender offer for Mills’ common stock, and an opportunity for Mills’ shareholders to exchange their stock for shares of Simon Property Group at a price to be determined at the signing of the merger agreement. Simon and Farallon would also replace the $1.55 billion loan Mills’ was set to receive from Brookfield, under terms they describe as “more favorable” than those offered by Brookfield. The tender offer would allow Mills to finish the deal six months earlier than the Brookfield deal, the new bidders say.
Some analyst scoff at the notion that Mills is suddenly worthy of a bidding war. The REIT is facing multiple lawsuits, including one by founder and former CEO Herbert S. Miller for “failing to comply with contractual duties,” as well as an investigation by the Securities and Exchange Commission for filing inaccurate financial statements. Matthew Ostrower, an analyst for Morgan Stanley, says he was surprised by Simon’s offer. Prior to this morning’s announcement, he estimated the Mills’ target price at $13 per share. “The bidders involved in this transaction have access to inside information that is especially important in this case given the absence of financial statements since late 2005,” he wrote in a note to investors.
Indeed, the absence of accurate financial statements has given investors and potential buyers pause. In February of 2006, Mills disclosed that it would be restating earnings from 2000 to 2005. Its reports for 2006 have not yet been filed. Ross Nussbaum says that without the corrected numbers, he is unable to accurately evaluate the prices now being offered for Mills. In a note to investors, however, Nussbaum wrote: “We don’t think Simon would buy Mills at less than a 6 percent yield, as Simon shareholders would not likely be thrilled with a dilutive deal and the assumptions of outstanding legal liability.”
RBC Capital Markets has maintained a $26 per share target on Mills since August, in anticipation of a sale.
Executives at the Mills Corp. did not return calls for comment, but in a statement the company said it will consider the new proposal.
Shares of Mills’ stock rose to $25.51 at 1 p.m. Monday, up 15 percent from Friday’s close at $22.15