The Mills Saga Is Not Over

Includes: BAM, HAE, MLS
by: Shlomo Greenberg

One of the most interesting sagas of recent times surrounds real estate trust fund The Mills Corporation (MLS). Like a soap opera, it appears to be subject to a never-ending series of plot twists. As of yesterday, I was certain Gazit-Globe (NYSE:GLOB) would finally wrap up its takeover of this veteran New Jersey company, with all its income-producing properties and projects in the pipeline, which would not have been an acquisition target were it not for its poor management team. But these are often a boon for future good managements, and this is why the competition for Mills was intense.

Yesterday, as all the experts tried to guess whether it would be Gazit-Globe or the prestigious Californian hedge fund Farallon Capital Management LLC that would clinch Mills, another no less prestigious contender from Canada called Brookfield Asset Management (NYSE:BAM) emerged from the shadows and put an offer on the table that Mills management immediately accepted. The Canadian bid, as far as is known, was fairly similar to those of Gazit-Globe and Farallon.

It is not clear yet whether this is the end of the affair, since together, Gazit-Globe and Farallon own a large tranche of shares in Mills (Farallon is the largest shareholder in Mills and Gazit-Globe the second-largest), and they will hold the key when the acquisition offer is put to shareholders. Since both Gazit-Globe and Farallon have a keen interest in Mills, and since both have made offers that are not far from Brookfield’s, I assume this battle is far from over.

The saga, which first began a few months back with the removal of Mills's chairman and president, reached a climax at the end of last week, when management suddenly announced that it would have to declare itself bankrupt. Why? Because it will be required in March to begin repaying the $1 billion it originally borrowed from Goldman Sachs, and management fears it will not be able to secure sufficient guarantees to get an extension on the loan. The announcement sent Mills shares down 39.5% in the last three trading days to $12.07 from $19.55 on volume in excess of 19 million shares.

Those with experience of cases like these were quick to pick up the stock on its downward spiral, since it would be absurd to think the values should change so drastically because of an announcement of possible bankruptcy and with two formidable bidders battling for control of the company. The last thing I would have expected the Gazit-Globe management to do was give up the opportunity and not use it to strengthen its position as a candidate for the controlling stake in Mills, especially given that Farallon has more shares and the battle between the two companies appeared to be a close call by the weekend. Since Gazit-Globe cannot make any comment due to its involvement, I can only guess that this is what happened.

It could be (and is even highly probable) that Farallon also used the falls to increase its control. Either way, at the beginning of the week, both competitors put offers on the table. This sent Mills up 17% on Tuesday. The volume that day was also much larger than usual, and I think the buyers were the same people who sold in a panic the week before and realized they had made a mistake. After Brookfield emerged from the Canadian prairie yesterday as the apparent winner, the stock gained a further 17%. This shows how incredible things are on Wall Street. Nothing happened at Mills itself, yet in a less than a week, the stock fell 39.5% and then more than recouped its losses.

A few words now on the bidders. We all know and admire Gazit-Globe. Farallon is a highly prestigious hedge fund (its owners claim it is the fourth-largest in the world, with $10 billion in assets under management). The big money it manages comes from top universities in the U.S., among them Yale and Stanford. The man behind the fund is Thomas F. Steyer, a living legend in the financial world, assisted by David Cohen. Both men are graduates of Goldman Sachs and are professionals of the highest caliber, as are all the other 80 team members at the fund. So Farallon is a top-rate rival. Knowing Gazit-Globe chairman Chaim Katzman as I do, I would not be surprised if he and Steyer see eye-to-eye and end up joining forces against the Canadians. Who knows?

Brookfield is an investment management and holdings company with more than $50 billion in assets under management. Its president and CEO is Bruce Flatt, a well-known real estate developer, who has been at the helm since 2002. The company’s stock has been one of the top investments on the NYSE for some time.

So who will finally clinch control of the New Jersey company, which said it was going bankrupt last week and over which a number of big players are waging all-out war? Investors clearly do not believe the Canadian offer of $21 a share plus liability for all Mills’s debts and massive credit is the end of the line, and they made this clear by sending the stock far higher than its average price. I sense that Gazit-Globe and Farallon picked up a lot of shares last week so their strength at any vote by shareholders will be more than was thought. I also think both companies will up their bids again, but not by much. Katzman and Steyer are both highly experienced managers and they won’t pay premiums without good reason.

What about the Canadians? I asked some friends from Toronto about them, and the answer I got was that they are from Calgary and the people have a reputation for being tough. So Brookfield will probably raise its bid too. This saga has taught me two things. One is that when a stock takes a tumble because of events on Wall Street rather than Main Street, it’s worth buying. Second, who said real estate was dull?

MLS 1-year chart:

Published originally by Globes [online], Israel business news -
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007. Republished on Seeking Alpha with full permission.