Israel's Gazit Proposes
Controlling Stake in Mills

Israeli real-estate company Gazit-Globe Ltd. proposed injecting as much as $1.2 billion in Mills Corp., a move that would give Gazit-Globe control of the shopping-mall developer. Although Mills stock jumped on the news, analysts reacted with skepticism.

Separately, Mills said yesterday that it wouldn't pay its third- and fourth-quarter dividends, in keeping with provisions of its term loan with Goldman Sachs Group Inc., and signaling its continuing cash problems.

The proposal was made public in a filing yesterday with the Securities and Exchange Commission, in which Gazit-Globe said it increased its stake in the shopping-mall real-estate investment trust to 9% from 4.9% earlier this month. Gazit-Globe's recapitalization proposal was made in a letter to Mills's then-Chief Executive Larry Siegel Sept. 29.

Mills shares were up 14% to $19.35 at 4 p.m. in New York Stock Exchange composite trading.

Analysts reacted to the Gazit-Globe proposal with skepticism, noting its chairman, Chaim Katzman, who is also CEO of Equity One Inc., a little more than a year ago announced a big bid for Cedar Shopping Centers Inc. that he walked away from shortly thereafter. The Gazit-Globe offer for Mills came in the form of a nonbinding indication of interest. "To my mind, it's not a very credible letter," said Matthew Ostrower, an analyst with Morgan Stanley.

Gazit-Globe said it declined to receive nonpublic information from the company because it wants to be able to sell Mills shares. "The terms and the fact they don't want inside information, because they want the right to sell at the drop of a hat; those things should raise eyebrows," Mr. Ostrower said.

Ross Nussbaum, an analyst with Banc of America Securities, in a note agreed, given Mr. Katzman's "history of throwing out big numbers" that don't materialize. "We can't help but wonder whether Gazit-Globe is trying to 'stir the pot' to salvage its $110 million current investment in Mills, which was purchased at an average price of $21.62."

The proposed deal would create a new B-class of shares and give Gazit-Globe control of the board while allowing Mills to pay down significantly its term loan from Goldman without selling assets. But it would also dilute Mills's shares by adding 49 million shares to the current 56 million outstanding.

"Chaim Katzman has an impressive track record," said Mills CEO Mark S. Ordan. "I enjoyed meeting with him. But we're not in a position to respond to an offer like that since we haven't released our numbers."

Mills, Chevy Chase, Md., has been battered over the past year by accounting and cash-flow problems that have spurred a Securities and Exchange Commission investigation, an exodus of investors and a search for a "strategic alternative" for the company, such as an outright or partial sale. Mills shares have plunged from $50.94 a year ago.

"At this point it is clear to us that an outright sale of the company is not in the best interests of [Mills] shareholders," Mr. Katzman said in a statement. "We believe Mills can and should be rebuilt, and not sold" at a distressed price, he said.

Mr. Nussbaum said in the note that he would be surprised if Mills accepted the offer, given that its earnings are due to be released soon, and it could then open up an auction for the company.

Gazit, which is traded on the Tel Aviv Stock Exchange, owns a 41% stake in Equity One, a North Miami Beach, Fla., strip-mall REIT, and a 53% stake in First Capital Realty Inc., a Canadian strip-mall company. Mr. Katzman is chairman and CEO of Equity One, but will be succeeded as CEO by Jeffrey Olsen in April.

Last month Mr. Siegel resigned as CEO after more than a decade at the top of Mills, and Mr. Ordan, who joined the company in March, took over.

Mills hasn't filed earnings since the third quarter of last year and several times has pushed back the date it says it expects to file. Mills's most recent target date for filing is Tuesday. The company has been trying to sell itself for months, but prospective bidders have said they can't get a valuation of Mills until its audited financials are released.

A tentative deal by Colony Capital Acquisitions LLC to take over Mills's Meadowlands Xanadu megamall project in New Jersey was supposed to close by Sept. 21 but has been delayed as well. That has concerned investors who worry the deal may fall through.

In a letter to Mr. Ordan Oct. 9, Mr. Katzman said his recapitalization proposal would allow Mills "to negotiate from a greater position of strength" with Colony.

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