New Suitor Ignites Battle For Ailing Mills Corp.

Another major battle has surfaced in the commercial real estate market, this time over the ailing mall developer Mills Corporation.

Simon Property Group, the nations largest mall developer, and Farallon Capital Management, a $26 billion hedge fund, made a $1.56 billion cash bid on Monday morning for Mills, challenging its already agreed-upon deal to be sold for $1.4 billion to Brookfield Capital Management.

It is the latest takeover struggle in the real estate market, which is in the midst of a record bidding war over Equity Office Properties Trust, the REIT founded by the billionaire Samuel Zell.

The Blackstone Group, a buyout firm, and a consortium led by Vornado Realty Trust are competing for that deal, which is expected to be settled this week at a price that may surpass $40 billion.

The offer from Simon and Farallon is worth about $24 a share in cash, the people briefed on the plans said. Brookfield had agreed to pay $21 a share, an 18 percent premium at the time, but Mills shareholders had shown their unhappiness with the offer by bidding shares up to $22.15, in anticipation that another suitor might emerge.

In addition to a higher bid, Simon and Farallon are dangling the lure of quick payment — at least six months sooner than under Brookfields deal — by making a tender offer.

Simon and Farallon will each contribute $650 million in equity to finance their offer. The two have also reached a deal with Stark Master Fund, another hedge fund with a major stake in Mills, giving them the option of buying 2.8 million shares, also at $23 each. Farallon and Stark together control about 16 percent of Millss shares.

The deal values Mills at a total of $7 billion, including $1.56 billion in equity, $4.5 billion in debt and the possible future payment of $1 billion for the companys preferred shares.

Though Brookfield, based in Toronto, manages $50 billion in assets worldwide, including premier office space like the World Financial Center in Lower Manhattan, the company is better known for properties like power plants and timberland.

Its retail real estate portfolio includes just three malls in Brazil. In Millss Jan. 17 announcement, its chief executive, Mark S. Ordan, said that Brookfield would use his company as a serious entry into the sector.

As Mills struggled to stay afloat last year, Farallon and Gazit-Globe, another major stakeholder, offered recapitalization plans. Farallon had offered to invest $499 million at $20 a share.

Gazit-Globe, an Israeli real estate firm that holds 7.9 percent of Mills, offered a $1.8 billion recapitalization at $21 a share. But Mills said it chose the Brookfield bid in part because the company would assume a $1 billion loan from Goldman Sachs that would come due March 31.

On the same day the Brookfield agreement was announced, Gazit-Globe denounced the deal as inferior and raised its offer to $22 a share.

Simon Property, with $48 billion in assets, manages upscale shopping centers like Phipps Plaza in Atlanta and the Woodbury Common Premium Outlets in Central Valley, N.Y.

Run by David E. Simon, the sometimes sharp-tongued son of the co-founder Melvin Simon, the company is known for its aggressive moves. In 2003, Simon Property and another developer, Westfield America, waged a hostile fight for the Taubman Centers mall empire, making a $1.74 billion bid that was accepted by 85 percent of Taubmans public shareholders.

Simon and Westfield were foiled by the state of Michigan, which amended its takeover laws to protect the developer, which is based in Bloomfield Hills.

Mills, which is based in Chevy Chase, Md., pioneered the concept of shoppertainment, starting with the opening in 1985 of Potomac Mills outside Washington. The company built centers that blended outlet shopping, movie theaters, Ferris wheels and in at least one mall, a nondenominational church.

Yet as Mills sped forward with expansion plans, it found itself bleeding cash and struggling to meet analyst expectations. Newer rivals like open-air shopping centers offered a cheaper alternative to the money-draining Mills approach.

Last March, the company disclosed that the Securities and Exchange Commission had started a formal investigation into its accounting practices. Mills has not filed a financial statement since the third quarter of 2005, and it has said that it must restate its earnings dating back to 2001.

Since then, Mills has sold off assets to raise cash. In November, Mills ceded control of its 2.2 million-square-foot Xanadu project in New Jerseys Meadowlands, to Colony Capital, a private investment firm, and said it would write off between $635 million to $655 million in losses.

The bid will be structured so that it remains off balance sheet for Simon to protect it from any legal liability stemming from shareholder lawsuits, people briefed on the offer said.

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