The woes of Mills Corp. continue to pile up—including a formal probe by the Securities and Exchange Commission, which was disclosed last Friday. But as the prospects for the company as a public REIT dim, investors are see a bright future for Mills shares in a takeover play. Hedge funds and institutional investors are buying up Mills shares, betting that somebody is going to pay a premium to snap up the beleaguered developer.

In recent weeks, Fidelity Management & Research Co. has acquired 5,726,700 Mills Corp. shares, 10.2 percent of its common stock, making it the second largest institutional stockholder in the firm (No. 1 is REIT mutual fund giant Cohen & Steers Capital Management). Also, Michael Roth and Brian Stark, through hedge funds Shepherd Investments International Ltd. and Stark International have spent $145.6 million to acquire 3.6 million shares, about 6.4 percent of its stock. The shares have risen marginally to nearly $29 from a 52-week low of $27.75 last week. The 52-week high was $66.44 in August 2005.

Meanwhile, major holders including Cohen & Steers and Barclays Global Investors UK Holdings Ltd., each have upped their stakes in the company. Cohen & Steers, the largest institutional holder, upped its stake from just over 6 million shares to nearly 7.5 million shares while Barclays went from about 2.5 million shares to 4.1 million shares.

Who might buy Mills? Vornado Realty Trust CEO Steve Roth and President Michael Fascitelli acknowledged at Citigroup's REIT CEO Conference that they have been talking with Mills management and are interested in acquiring the company. Moreover, the Vornado execs say they are positioned to a large transaction in the near future and indicated that it could handle a deal as large as $10 billion. (Mills’ market cap is now around $1.6 billion).

"I don't think Mills has any future as a public company," says Barry Vinocur, editor of Realty Stock Review. "I think it's most likely will be a club deal with a number of investors involved, like the Toys 'R' Us or Alberston's deals."

Beyond Vornado, other firms rumored to be interested in the firm are Simon Property Group, General Growth Properties and Westfield Group. Spokespeople from Westfield, Simon and General Growth all declined to comment on their firm's potential interest in Mills.

Investors betting on a takeover may not see immediate gratification, however. Complicating a sale are questions about the true value of the company’s assets—including large-scale entertainment/retail venues such as Grapevine Mills as well as several of the regional mall assets it has acquired —following a series of accounting snafus. Moreover, there is a growing line of investors to deal with through shareholder lawsuits.

"There are real questions about the quality of income on its portfolio," Vinocur says. "You just don't really know how some of the projects are performing."

Mills troubles have affected other companies as well, most notably German fund manager KanAm International, a long-time partner with the company that has invested about $1 billion in Mills development projects since 1994. According to the Chicago Tribune, KanAm is in negotiations to sell 444 N. Michigan Ave., a 503,000-square-foot office building, and the 320,000-square-foot 24th at Camelback shopping center in Phoenix for a total of between $228 million and $243 million in a bid to raise cash.

Mills management is maintaining a low profile. (The company did not return calls seeking comment for this story.) Until last week, it had refused to answer analyst questions and was communicating only through press releases and SEC filings. But over the weekend, Mills Corp. executives met with David Fick of Stifel Nicolaus.

Fick told shareholders that the company has promised to begin providing property-level information to help allay concerns about the underlying value of its assets. He upgraded the stock to Buy with a target price of $40 per share. Despite the uncertainly surrounding the SEC investigation and shareholder suits, Fick feels that the shares are undervalued relative to the net asset value of the real estate.

-- David Bodamer