Brookfield Deal for Mills
May Not End Drama

Brookfield Asset Management Inc.'s $1.35 billion agreement to buy Mills Corp. underscores investors' appetite for even troubled commercial-real-estate assets. But it may not be the end of a long drama to determine the fate of the mall real-estate investment trust.

Shortly after Toronto-based Brookfield offered $21 a share to Mills shareholders yesterday, Gazit-Globe Ltd., Mills's second-largest investor, labeled the bid as "inferior." Gazit-Globe raised its previous offer to infuse new capital into Mills in a transaction that would value new Mills shares at $22 each.

Meanwhile, Mills shares hovered close to the $22-a-share level most of the day, signaling that some investors expect Brookfield's bid could be topped. Mills shares were at $22.46, up 26%, in 4 p.m. New York Stock Exchange composite trading. Brookfield's shares were up 1% to $48.50, also on the Big Board.

Brookfield's proposal, agreed to by the Mills board, represents an 18% premium over Mills's Tuesday 4 p.m. share price of $17.77.

Mills Chief Executive Mark Ordan said the company considered the previous Gazit recapitalization offer, as well as one by California hedge fund Farallon Partners LP, but it determined Brookfield's bid, which is all cash and assumes Mills's debt, was best. "The company was in a fortunate position of being able to weigh competing offers," he said, adding that the Brookfield deal has a breakup fee that starts at $40 million.

Mr. Ordan also said Brookfield is interested in Mills, of Chevy Chase, Md., as a platform for its entry into retail real estate. Brookfield declined to comment.

In a statement, a Gazit spokesman said, "We are reviewing our options, and will make a determination of our course of action at the appropriate time." A spokeswoman for Farallon, Mills's largest investor, declined to comment.

At a time when some investors are finding it difficult to find affordable commercial property, Brookfield is willing to gamble on a company with serious legal liability issues that hasn't released audited financials in more than five quarters. (In another sign of interest in real estate, a consortium launched a $21.5 billion offer for Equity Office Properties Trust.

The Brookfield agreement, if closed, would end a 15-month drama at the once-highflying Mills, a REIT tripped up by, among other problems, ill-fated developments and accounting woes -- some of which a recent internal investigation said were caused by "possible misconduct."

"Brookfield is very strong at dealing with distressed and messy situations," said Michael Winer, who manages the Third Avenue Real Estate Value Fund, which is the third-largest Brookfield Asset Management shareholder, according to Thomson Financial.

Brookfield Asset Management, which owns a controlling stake in office-building owner Brookfield Properties Corp., focuses on long-term, income-producing investments such as hydropower, timber and commercial real estate, and has more than $50 billion in assets under management. But most of its commercial-real-estate holdings are in office buildings, not retail. That raised questions among some analysts about how it would run a company that has seen an employee exodus over the last year and has some underperforming shopping centers that need attention.

"The Brookfield guys are really smart. However, they're not in the retail business," said Jim Sullivan, an analyst with Green Street Advisors, a Newport Beach, Calif., real-estate research firm. Adding that Mills owns troubled properties that require management attention, he said, "who's going to run them?"

Barney Phillips, who heads the REIT practice for Skadden, Arps, Slate, Meagher & Flom LLP, a New York-based law firm, said Brookfield "obviously decided they can work out these problems in a way that makes sense to them, but it may also be a case of too much capital chasing too few assets."

The Brookfield deal, announced yesterday morning, was followed shortly by the revised offer from Israel-based Gazit, which raised its $21 a share offer to $22. Unlike the Brookfield deal, Gazit's offer wouldn't involve buying Mills outright. Under its offer, Mills would issue new shares at $22 each, infusing more than $1.1 billion of new capital into the company, along with a $675 million loan that would allow Mills to refinance a loan coming due March 31. The recapitalization offer would dilute existing shareholders but allow them to bet on the potential upside of a stabilized portfolio of assets.

Brookfield structured its deal in part to take the recapitalization offers into consideration. The deal would keep Mills as a public company and allow Mills investors to buy as much as 20% of shares. Mills investors have lost more than $2 billion in shareholder value since the company's problems came to light in October. Brookfield said it agreed to assume Mills's $1 billion term loan with Goldman Sachs Group Inc. and will revise the terms.

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