Mills Chatter Grinds On

Some investors expect a deal by year's end.
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With so much bad news behind Mills Corp. (MLS) , some investors believe the company can now be sold before the end of the year.

While most real estate investment trusts have again been on fire this year, Mills' stock is down 48% for 2006. The embattled mall owner is in the midst of restating its financial results, while also exploring a sale of the company and battling numerous shareholder lawsuits.

Two portfolio managers who own the stock expect Mills to be sold by the end of December, either before or after the company files its restated financial results.

The real question for investors is the price at which a deal gets done. The stock is currently trading around $21.75. It's hard to say whether the company is worth a price more than that.

Mills owns a mixed portfolio of mall properties that includes traditional malls, discount-oriented centers and large entertainment-focused retail properties.

It's rare for such a large U.S. mall portfolio to trade hands, and that is why several parties -- including mall giant

Simon Property Group

(SPG) - Get Report

, Australian property investors and private-equity shops -- likely are interested in Mills, sources say.

Mills couldn't be reached for comment on the sale process.

The good news for Mills' investors is that two of the mall owner's biggest problems are behind it, which should make a sale of the company easier, says one fund manager whose firm owns the stock. He spoke on the condition of anonymity.

The company recently closed on the sale of its massive Meadowlands Xanadu development project to Colony Capital. The troubled project sold at a discount, but the divestiture helps liquidity issues at Mills and makes the company a cleaner sale.

The other positive news is that Larry Siegel, the company's problematic CEO, has left the company. Siegel took much of the blame for letting costs spiral out of control at the Meadowlands project. He also was considered to be Mills' creative visionary who may have been against a sale of the company.

Mills said in late November that it expects to file its annual report in December. The company hasn't posted financials in over a year. Its annual shareholder meeting is Dec. 29, and investors hope a deal is announced by then.

One of Mills' largest shareholders, Israeli real estate firm Gazit-Globe, offered in November to recapitalize the company under a contingent offer that values Mills at $25.50 a share. Mills called the offer "highly conditional," and several sources don't expect that deal to be accomplished.

Of course, many dedicated REIT investors continue to avoid the company, rather than gambling on a buyout occurring soon.

"You're talking about a company where you have no knowledge in terms of debt levels, in terms of NOI (net operating income)," says Jeung Hyun, a principal at Adelante Capital Management, which has never owned Mills' stock.

Hyun declined to speculate on whether the stock is worth what Gazit-Globe offered.

"I can take guesses as to what the asset is worth. But to suggest there is no risk is disingenuous," Hyun says.

Dean Frankel, a portfolio manager at Urdang Securities Management, which owns a small position in Mills, expects the company to be sold within the next month. This time frame was echoed by a portfolio manager at another firm who owns Mills stock but declined to be named.

"What is the purpose of staying public right now for them?" Frankel says. He declined to give a possible value for the company without the company's restated financials.

But Frankel did speculate that a buyout deal for Mills could occur in the $25-and-up range.

Wall Street analysts have mostly given up on Mills after the company's numerous missteps destroyed so much shareholder value.

Bank of America analyst Ross Nussbaum has a target price of $20 on the stock. This is a blend of the midpoint of his top-down net asset value estimate of $16, and a bottoms-up (asset-by-asset) NAV estimate of $25.

"The closing of the Colony (Meadowlands) deal removes some of the risk from the story, but the filing of Mills' audited financials remains a big hurdle," Nussbaum wrote in a recent report. "Until then, we have little visibility on the impact of accounting restatements on NAV."

Stifel Nicolaus analyst David Fick believes Mills could fetch $25 in a sale, but the risk is too great to own the stock, he wrote in a recent report.

Several hedge funds, meanwhile, still have large positions in the company. Farallon Capital, for one, owns 10.9% of Mills and recently agreed to a standstill agreement in exchange for a look at the company's private financial records. (Gazit-Globe recently agreed to the same terms.)

The standstill agreement means neither party can launch or participate in a hostile bid until March 30, 2007. However, either could be involved in a friendly bid.

Betting on a deal to occur soon at a healthy premium remains a gamble. While investors and analysts say a sale at $25 could occur, trying to pinpoint that value now without financials makes the stock a difficult investment.