One measure of how dicey things are for beleaguered Mills Corp. is the inconclusive response to its invitation for takeover bids. Facing a deteriorating financial situation and investigation by the Securities & Exchange Commission, the Arlington-based developer opened up a bidding contest in May. The deadline for entries passed last week and the only news from the publicly-held REIT was a brief statement indicating that it had received responses, but declined to elaborate on how many companies expressed interest or provide any information about the bids.

That has some industry insiders wondering whether Mills will be able to sell itself wholesale, or will be forced to sell off pieces. “People are saying that some of the assets are not attractive to them, the development pipeline is too risky and with things like Xanadu, you don’t know how it’s going to turn out, so it’s difficult to put a premium on it,” says one analyst who asked not to be named. “Some of the entertainment malls are not that profitable and buyers wonder whether they would be getting the proper return on them and the kind of tenants that go with them. They don’t necessarily fit with what other mall owners are looking for.”

Another factor overhanging the auction is a lack of clarity on Mills’ financial picture— the company has said that it will have to restate its financial statements for 2000-2004 and will file its 10-K reports for 2005 and the first quarter of 2006 by the end of this summer—and the ongoing investigation by the SEC. The company disclosed last fall that the SEC was questioning the REIT about several years worth of inaccurate financial reports. When the questioning grew into a full-blown investigation in March, a corporate restructuring ensued, resulting in layoffs of more than 150 people, including key management personnel.

Until the investigation is complete and the updated numbers are available, it may be impossible to solicit a valid offer. For now, the estimates of a take-out price vary widely. “The last time I looked people’s estimates were all over the map, from high $20s to mid $30s,” says the analyst. “The reason they are hesitant is because [Mills] accounts aren’t finished.” Mills shares are at $28.53 per share, $2 above its 52-week low of $26.30 per share and well off its 52-week high of $66.44 per share.

The uncertainty kept Westfield Group out of the recent auction, even though its chairman, Frank Lowy, has said his company would be interested in Mills assets. Lowy told The Australian on June 15 that Westfield in not going to be told when it can bid on something. He left the door open, however, for the possibility of future negotiations.

Vornado Realty Trust has also held preliminary talks with Mills, but at this point it’s uncertain whether the company is taking part in the auction.
Conscious of its declining status, Mills has taken some steps to avoid a breakup. The company just closed a $2.23 billion financing through Goldman Sachs, in the hope of raising its value. The additional funds will give it the option not to sell if the bidding offers are too low.

“We believe Goldman Sachs’ re-capitalization of Mills debt could mean the company is trying to gain additional flexibility and liquidity, so as not to portray to potential buyers the desperation to sell and thereby garner a higher bid,” wrote Banc of America Securities analyst Ross Nussbaum.
“The additional breathing room gives the company options should … offers received from potential buyers [be] low.”

Companies that have recently bought Mills shares and might be on the bid list include San Francisco-based hedge fund Farallon Partners and Stark Investments. The Lightstone Group, Simon Property Group, Inc. and Taubman Centers, Inc. have also expressed interest in the firm.

In early April, the company received waivers through Dec. 31 with respect to defaults on construction loans at Pittsburgh Mills, Cincinnati Mills, St. Louis Mills and Discover Mills. Simultaneously, the company arranged a $625 million mortgage on its Sawgrass Mills property. Mills also cut its first-quarter dividend to $0.251 per common share for its shareholders and cut dividends on a series of its preferred shares.

– Elaine Misonzhnik