After struggling for a year to find a buyer, Mills Corp. on Tuesday moved closer to accepting its second buyout offer in less than four weeks. The Chevy Chase, Md.-based company’s board determined that Simon Property Group’s and Farallon Capital Management’s $24 per share offer—including $1.56 billion in cash and about $4.9 billion in assumed debt – is superior to the $7.5 billion offer it received from Canadian office REIT Brookfield Asset Management that included $1.35 billion in cash and an estimated $5.1 billion in assumed debt. Both bids also offered shareholders the opportunity to get shares of the acquiring companies’ stock.

After the announcement, Mills stock went from $25.60 per share at the close of the day on Monday to $26.24 on Tuesday, an increase of 2.5 percent. Simon’s stock went from $114.76 per share on Friday to $117, an increase of 1.9 percent.

The Mills saga has been marked with twists and turns the whole way, so it’s possible that an agreement with Simon and Farallon would not be the end of the story. Brookfield now has until Friday to come up with a better offer. If Brookfield bows out of the contest, it would receive a $40 million breakup fee from Simon and its partner, plus reimbursement for expenses.

A spokesman for Simon declined to comment on the news, saying the company is waiting to see if Brookfield will make a counter-offer. Analysts are split on this issue – Brookfield just closed its $2.15 billion acquisition of Longview Fibre Company, a REIT that owns and manages 588,000 acres of softwood timberlands, on Feb. 5 and might not be ready to up the offer for Mills at this stage, says Rich Moore, an analyst with RBC Capital Markets. It’s also unclear whether Mills merits a higher price in the absence of financial data for all of 2006 and most of 2005, though Moore estimates it may be worth as much as $40 or $50 per share. But Akash Dave, who follows both Brookfield and Mills for Morningstar, says that a new bid is possible and does not rule out additional bids from other mall operators.

Brookfield did not return calls seeking comment.

It’s also possible that yet another party could emerge in the bidding, such as Gazit-Globe Ltd., an Israeli REIT that has played a high-profile role with the company. In the fall of 2006, Gazit-Globe, which owns 9 percent of Mills’ stock, made a $1.2 billion re-capitalization offer to the company, saying a sale would not be in the best interest of its shareholders. Mills never accepted this offer, nor a subsequent $1.8 billion one Gazit-Globe made in January to prevent Mills from agreeing to a deal with Brookfield.

If Simon and Farallon do end up with Mills, the deal would change Simon’s debt to gross asset value ratio from 35 percent to 40 percent, according to Bank of America analyst Ross Nussbaum. Simon currently has a debt load of $15.39 billion. Mills, with a debt to asset value ratio of almost 85 percent, is more than $5.1 billion in debt, including $71 million in liability related to various legal proceedings. Mills is facing several shareholder lawsuits related to its restatement of financial reports from 2000 to 2005, including one by the company’s founder and former CEO Herbert S. Miller.

But Simon and Farallon’s 50/50 partnership structure would protect Simon from having to take on all of Mills’ debt by itself, says Merrie S. Frankel, of Moody’s Investors Service. “Under the currently proposed structure, the deal is not going to affect Simon’s credit rating,” she notes.

That might be one of the reasons Simon decided to partner with Farallon, even though, according to Moore, it had the funds to bid for Mills on its own. Another reason was to eliminate a potential rival – Farallon, which owns 10.9 percent of Mills’ stock, had previously expressed interest in buying Mills.

In spite of Mills’ financial and legal troubles, the company’s portfolio still offers a good value for Simon, according to Citigroup analyst Jonathan Litt. Mills’ 38 regional and outlet malls are 93 percent leased and generate an average of $368 in sales per square foot. “The bid looks good for Simon, given the likelihood of healthy promotes on Farallon’s 50 percent stake, the quality locations of many of Mills’ properties, and asset under-management given Mills’ troubles,” Litt wrote in a note on Feb. 5.

But some analysts suspect that Simon would have preferred to wait until Mills’ financial reports became public and put in the $24 per share bid only because Brookfield was close to getting the deal. “The reason Simon had NOT bid [before] was that they surmised the audited financials would reveal a more negative picture of Mills than was implied by the stock price,” writes Wachovia’s Jeffrey J. Donnelly. Under the current scenario, Donnelly speculates that Simon might be accepting more risk than it originally intended.

Most analysts expect that Simon will hold on to Mills’ regional and outlet mall properties, which offer upside in leasing and occupancy, and will dispose of the weaker assets, such as those featuring entertainment components, because they are harder to manage.

The Simon/Farallon deal offers Mills the following terms: a tender offer of $24 per share for its outstanding stock, an opportunity for Mills’ shareholders to exchange their stock for shares of Simon Property Group at a price to be determined at the time of the merger agreement, $4.9 billion in assumed debt, including a replacement of the $1.55 billion loan Mills was set to receive from Brookfield to repay its debt to Goldman Sachs, and a closing date that would, because of the tender offer, take place at least six months earlier than the closing of the Brookfield deal.

The Brookfield offer included $5.1 billion in assumed debt, but the $21 per share price for Mills’ common and preferred stock is $3 lower than what Mills would be getting from Simon and Farallon. The deal was scheduled to close in the second quarter of 2007.

--Elaine Misonzhnik