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Brookfield to Acquire Mills Corp. for $7.5 Billion

Troubled mall REIT Mills Corp. has a buyer at last. The Chevy Chase, Md.-based REIT (NYSE:MLS), which recently disclosed that it was in jeopardy of having to declare bankruptcy due to an approaching mortgage deadline, has inked an agreement to be acquired by Toronto-based Brookfield Asset Management Inc. (NYSE:BAM) for approximately $7.5 billion. That reflects a cash price of $21 per share, or $1.35 billion plus assumed debt and preferred stock, according to a Jan. 17 press release from both companies.

“We believe we have achieved an outcome that is the best possible result for all involved,” said Mills President and CEO Mark Ordan. Mills opted to accept Brookfield’s offer after considering several alternatives in a competitive process.

At least two of those alternatives involved massive stock purchase offers by the Mills’ largest shareholders. On the morning of Jan. 16, Farallon Partners, which holds 10.9% of all shares — offered to buy $499 million of new MLS stock. By late afternoon, Gazit-Globe Ltd. made a similar recapitalization offer of $500 million for a portion of Mills shares.

Either of the half-billion-dollar stock purchases could have helped to solve Mills most pressing problem — a March 31 deadline to pay a $1.06 billion mortgage loan from lenders represented by Goldman Sachs Mortgage Co. Farallon’s equity was to have been augmented with CMBS proceeds to pay down the loan, while a Gazit-Globe 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 Wednesday release. “We firmly believe that the best interests of the shareholders have not been served by this decision. We are reviewing our options, and will make a determination of our course of action at the appropriate time.”

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

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.

“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 The 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. The agreement provided for a further extension if Mills met certain conditions, which included filing its 2005 financials with the Securities & Exchange Commission by the end of January, and filing its audited financials for 2006 by March 1.

The likelihood of gaining a further extension seems unlikely, with the March 1 deadline for filing 2006 financials a scant two weeks away. Mills just completed a lengthy internal investigation into its accounting irregularities earlier this month, stating it will cut shareholder equity by as much as $352 million. Disconcertingly, the investigation turned up possible misconduct behind some of the many accounting problems discovered.

Brookfield’s proffered price of $21 per share is at the high end of prices many analysts had projected in the event of a sale, but is in line with the $21 value Gazit-Globe included in its recapitalization bid. Farallon offered to pay $20 per share, minus a fee that would have resulted in a net $19.20 per share.

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 Rich Moore, lead analyst at RBC Capital Markets. Another buyer could emerge with a higher offer as well.

“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 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. “We expected since August that someone would buy these guys,” Moore says. “There’s no management team left, no pipeline left, no anything left, so it had to be sold.”

As recently as Jan. 16, analyst Ross Nussbaum at Bank of America estimated the value of Mills’ assets at $10 to $12 per share. The same day, Morgan Stanley analysts Matthew Ostrower and Mick Chiang estimated Mills’ value at between $4 and $20 per share, with a price target of $13. Mills’ failure to publish financial results for 2005 and 2006 make value assessments challenging for analysts as well as shareholders.

“MLS’ appropriate valuation is enormously difficult to determine given the lack of recent disclosure and the likely ongoing accounting restatements,” Morgan Stanley analysts reported on Jan. 16. “We continue to believe that setting an appropriate price target for the company is a gamble more than anything else.”

A few hours after announcement of the agreement with Brookfield, Bank of America’s Nussbaum set his target price for the stock at the $21 purchase price. He added, however, that Gazit had increased its refi offer to $22 per share from $21. “We cannot rule out the possibility that Gazit and other large holders could exert enough influence to force BAM to raise its offer.”

Brookfield is being generous in its offer to Mills stockholders, Nussbaum suggests in a Jan. 17 report. “Based on our analysis, the implied cap rate on the deal is 6.15%, which, in our view, meaningfully overvalues Mills’ assets,” he says. “Our cap rate had been 6.75%.”

Under terms of the agreement, Brookfield will purchase all outstanding common stock of Mills and common units of The Mills Limited Partnership, plus approximately $7.5 billion including assumed debt and preferred stock. Mills will merge into a newly formed Brookfield subsidiary. Mills stockholders will have the option to accept a cash payment for their shares or receive instead a stake in the public company that will continue to manage the former Mills assets. The stock alternative will be subject to proration if more than 20% if existing Mills shareholders elect to receive stock.

The transaction is subject to approval by Mills’ stockholders. Mills and Brookfield expect to file a proxy statement in connection with the special meeting of stockholders following the filing of Mills’ annual report for the year ended Dec. 31, 2006. The merger is expected to close in the second half of 2007.

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