In a 13D filing on The Mills Corporation (MLS), Gazit-Globe Ltd. disclosed a 9.7% stake (5.5 million shares) in the Company. This is up from the 5.1 million share stake the firm disclosed in a recent filing (10/25). The firm, which has been proposing a recapitalization instead of a sale of Mills, also disclosed it filed suit against the company seeking to force the company into holding an annual meeting.
In a letter sent to Mills, Chaim Katzman, Gazit-Globe's chairman, said, "It has now been well over a month since Gazit, as a concerned stockholder with a significant stake in Mills, contacted Mills to express its desire to aid in the search for strategic alternatives. The net sum of our talks with Mills can only be defined as the absence of substance. It is now clear to us that Mills' current Board of Directors and management team are not willing to engage us in a productive conversation. We believe your purpose is not to bring us into the strategic process, but rather to baffle, frustrate and ultimately deter Gazit's efforts to give its recapitalization proposal the hearing it deserves."
Katzman also said, "In addition to proposing at the annual meeting a slate of directors who we believe will provide the necessary vision to guide Mills through these difficult times, we will also be proposing that stockholders approve an amendment to its charter to eliminate the classified board structure which, in this case, serves to entrench the current leadership."
Gazit is Israel's largest real estate investment. The company operate their business in North America and Europe mainly through a 41% ownership of Equity One, Inc. (NYSE:EQY) and large ownership stake in First Capital Realty, Inc. and Citycon OYJ.
From the Purpose of Transaction section of the filing:
The Reporting Persons acquired their original position in the Shares for investment purposes consistent with one of Gazit's investment strategies of owning a portfolio of securities in publicly-traded REITs and other real estate companies. The Issuer had previously disclosed that it was considering strategic alternatives which the Reporting Persons subsequently learned included a potential sale of the Issuer.
Having studied the recent developments with respect to the Issuer and having amassed a significant ownership position in the Shares, Chaim Katzman, Chairman of the Board of Gazit, contacted by telephone representatives of the Issuer on several occasions during August through October. During these discussions, and in a meeting on August 22, 2006 with Laurence C. Siegel, the Issuer's Chairman of the Board and then Chief Executive Officer, Mr. Katzman discussed, among other things, the Issuer's situation and the idea of the Issuer being recapitalized as an alternative to an outright sale of the Issuer and requested that additional information about the Issuer be made publicly available. He advised that, given Gazit's significant investment in the Shares and its need to retain flexibility with respect to its investment, Gazit was unwilling to sign a confidentiality agreement with a standstill provision. Mr. Katzman advised that Gazit would sign a confidentiality agreement that did not contain a standstill provision.
After further internal analysis, external discussions and further study of the Issuer's assets and financial situation, as stated more fully in a letter, dated September 29, 2006, from Mr. Katzman to Mr. Siegel, which letter is filed as Exhibit 2 to the Schedule 13D and is incorporated herein by reference, Gazit submitted a non-binding indication of interest with respect to the recapitalization of the Issuer (the "Recapitalization Proposal"). Under the Recapitalization Proposal and subject to the terms and conditions therein, Gazit would invest new capital in exchange for newly authorized Series B common stock of the Issuer. Gazit proposes to invest up to $1.2 billion of cash at a per share purchase price of $24.50. The new Series B common stock would entitle Gazit to a majority of seats of the Issuer's board of directors and would be convertible into Shares.
On October 12, 2006, Mr. Katzman sent a letter to Mark S. Ordan, Chief Executive Officer the Issuer (with a copy to the board of directors of the Issuer) regarding the Issuer's failure to file material agreements with the SEC regarding various joint ventures between the Company and affiliated and third parties, which failure has resulted in the market place not having full disclosure about material information. A copy of this letter is filed as Exhibit 4 to the Schedule 13D and is incorporated herein by reference. Subsequent to Gazit's submission of the Recapitalization Proposal, the Reporting Persons purchased additional Shares in connection with its proposed recapitalization of the Issuer.
On October 20, 2006, Mr. Katzman and Michael Coster, a representative of RBC Capital Markets, Gazit's financial advisor, met with Mr. Ordan, other senior executives of the Issuer, and representatives of JP Morgan, the Issuer's financial advisor, to discuss the Recapitalization Proposal.
Mr. Katzman and Mr. Ordan discussed various aspects of the Issuer's business and financial condition. In that meeting, Mr. Katzman made a number of observations as to why a recapitalization, rather than a sale, was in the best interests of Issuer's stockholders, including the following:
• First, the Issuer would have time to complete the development and redevelopment program and lease-up activities that are currently underway within the portfolio.
• Second, the Issuer would have the time and resources to evaluate the multiple renovation and expansion opportunities previously identified in the portfolio.
• Third, the Issuer would have the time to appropriately market or develop the land surrounding several significant properties for higher and better uses such as residential or free-standing retail.
• Fourth, the successful completion of the development program noted above as well as the management changes already in place should, over time, begin to lower the company's cost of capital from that of an over-leveraged developer to that of a more conventionally-leveraged REIT with an emphasis on asset management.
• Fifth, the Issuer would be positioned to begin a process of simplifying its capital structure in a way that can lead to increased transparency in financial reporting.
• Sixth, execution of the aforementioned steps should lead to a higher valuation for the Issuer over-time.
• Finally, in a change of control, Issuer may not achieve full value and could forfeit some of its tax loss carry-forwards and incur other expenses.
Mr. Katzman expressed his belief that the execution of the aforementioned steps should lead to a higher valuation for the Issuer and its stockholders over time. He also noted that given the Issuer's significant upside potential, stockholders are entitled to receive a substantial premium to Gazit's proposed $24.50 per share price if the Issuer were to accept a buy-out offer. This is because a recapitalization leaves the Issuer with the opportunity to, in the future, sell the Issuer whereas a buy-out at this time is irreversible and deprives the Issuer's stockholders of the opportunity to realize the Issuer's upside potential. Therefore, for a buy-out offer to be successful, it should be at a higher per share price than the per share price offered in a recapitalization.
Mr. Katzman urged the Issuer to give the Recapitalization Proposal more serious consideration. Mr. Ordan advised that the Recapitalization Proposal had been on the Issuer's October 19, 2006 board agenda and was being treated as a bona fide offer. Mr. Katzman requested a meeting with the Issuer's board and Mr. Ordan advised that that board had formed a special committee to review the Issuer's strategic alternatives and that he would arrange for Mr. Katzman to meet with some or all the members of that committee the week of October 23, 2006.
Mr. Ordan expressed the Issuer's desire to have Gazit and its affiliates enter into a confidentiality and standstill agreement with the Issuer as a condition to Gazit receiving any non-public information relating to the Issuer. Mr. Katzman reiterated Gazit's unwillingness to enter into a standstill agreement with the Issuer for the reasons stated in the Recapitalization Proposal. Mr. Katzman also noted that there is no legal requirement for the Issuer to insist on a standstill in exchange for allowing a stockholder or bidder to review non-public information and that the Issuer's insistence on such a requirement, in the context of a bona fide proposal from a significant stockholder, was preventing the Issuer from fulfilling its fiduciary duty and receiving a potentially higher and better offer for the Issuer and its stockholders. Mr. Ordan stated that the Issuer would revisit the issue of the standstill requirement of its confidentiality agreement and advise Mr. Katzman of its conclusions.
Mr. Ordan also requested that Gazit prepare a specific list of information relating to the Issuer that it would like to review as well as provide to the Issuer a copy of the financial model Gazit was using in connection with its analysis of the Issuer and the Recapitalization Proposal. Mr. Ordan stated that the Issuer would consider providing specific information to Gazit, subject to Gazit signing a confidentiality agreement. Mr. Katzman advised that he would send such a list and make Gazit's model available.
Early in the morning of October 24, 2006, Mr. Ordan called Mr. Katzman and expressed an interest in continuing a dialog with respect to the Recapitalization Proposal and stated that he was working to arrange a meeting between Mr. Katzman and the Issuer's special committee as soon as practicable. Later in the day on October 24th, Mr. Katzman sent another letter to Mr. Ordan (with a copy to the board of directors of the Issuer) to follow-up on the October 20, 2006 meeting and provide the information list requested by Mr. Ordan. A copy of this letter is filed as Exhibit 5 to the Schedule 13D and is incorporated herein by reference. In addition, Gazit issued a press release shortly after the Initial Schedule 13D appeared on the SEC's website disclosing, among other things, the filing of this Schedule 13D. A copy of this press release is filed as Exhibit 6 to the Schedule 13D.
On October 26, 2006, representatives of Gazit management and representatives of RBC Capital Markets, Gazit's financial advisor, participated in a telephonic meeting with members of the Issuer's management and representatives of JP Morgan, the Issuer's financial advisor. During this call, RBC verbally provided the Issuer and JP Morgan with certain financial metrics used to derive the Recapitalization Proposal
On October 31, 2006, Mr. Katzman and members of Gazit management along with representatives of RBC Capital Markets, Gazit's financial advisor, met with Mr. Ordan, members of the Issuer's management, three of the Issuer's board members, including two members of the Issuer's special committee. At this meeting, Mr. Katzman repeated his observations previously made to Mr. Ordan as to why a recapitalization would be superior to a sale for the Issuer's stockholders, discussed the background leading up to Gazit's Recapitalization Proposal and Gazit's ability to consummate the Recapitalization Proposal. The presentation made by Gazit at this meeting is filed as Exhibit 7 to the Schedule 13D and is incorporated herein by reference.
Following discussions with Mark Ordan, Mr. Katzman offered to revise Gazit's proposed confidentiality agreement to include a limited standstill agreement in which Gazit would agree not to buy or sell any Mills stock until the Issuer filed its Form 10-K or, if earlier, the date on which the Issuer announced it had entered into an agreement with respect to strategic alternatives. Despite Mr. Ordan's agreement to arrange a meeting/conference call of the parties and their attorneys to negotiate a compromise, the Issuer has never proposed a time for such meeting. Rather, the last offer made by the Issuer's attorneys following Gazit's October 31, 2006 meeting with the Issuer's management and certain members of its board of directors was that Gazit agree to enter into a "July standstill" (i.e., for approximately a seven-month period) on the terms set forth in Issuer's form confidentiality agreement. For the reasons noted in the various letters filed as exhibits to the Schedule 13D, Gazit's counsel replied that the offer was non-responsive and an unacceptable compromise.
On November 2, 2006, counsel to Gazit sent a letter to Mark Ordan demanding that certain joint venture agreements be filed with the SEC. This letter is filed as Exhibit 8 to the Schedule 13D and is incorporated herein by reference.
On November 8, 2006, Chaim Katzman sent a letter to Mark Ordan informing him that Gazit is filing a lawsuit in the Delaware Court of Chancery pursuant to 8 Del. C. § 211, demanding that the Issuer hold an annual meeting of stockholders at which Gazit intends to propose its own directors. In addition, this letter put the Issuer on notice that it should not enter into any definitive agreement as to a change of control transaction, or the sale of significant assets, before the Issuer has filed its financials and joint venture agreements and given all potential bidders, including Gazit, fourteen days to review such materials and submit firm offers to the Issuer. This letter is filed as Exhibit 9 to the Schedule 13D and is incorporated herein by reference. The complaint relating to the lawsuit is filed as Exhibit 10 to the Schedule 13D. In addition, on November 8, 2006, Gazit intends to issue a press release announcing the filing of the lawsuit against the Issuer, which press release is filed as Exhibit 11 to the Schedule 13D.