A number of interesting developments emerged in the

Mills

( MLS) saga last week.

While merger talk continued to swirl around fellow real estate investment trust

Vornado

(VNO) - Get Report

, a hedge fund with ties to the commercial real estate industry disclosed that it had purchased a 6.4% stake in Mills, citing a compelling valuation.

Mills, which owns a large portfolio of retail malls and outlet centers, is currently restating its financials and looking at a

possible sale of the company or some of its assets. The REIT's stock has fallen 40% below its 52-week high of $66.44 set last August.

Vornado confirmed last week that it has spoken with Mills' management regarding some sort of deal, and said at a conference that it would be interested in Mills at the right price. Vornado, which is headed by well-respected real estate investor Steve Roth, owns several regional malls and lucrative retail real estate in New York City and the tri-state area. The company also owns office properties in major metro markets and was involved in the consortium that purchased Toys R Us for $6.6 billion last year.

"Steve Roth and

Mills CEO Larry Siegel, I believe, are close," says Dean Frankel, a portfolio manager with Urdang Securities Management, which owns Mills shares. "Larry has mentioned Steve Roth many times in conversations I've had

with him."

While Vornado might be interested in certain Mills assets, it may not want to buy the whole company, says Barry Vinocur, editor of

Realty Stock Review

. Vinocur and other industry experts believe a club deal, in which several parties team up to take different pieces of Mills, is more likely. But Vinocur doesn't believe any deal will happen until Mills has its restated financials to show prospective buyers, and his sources tell him that restated financials won't be ready until April at the earliest.

Mills' portfolio is split into its newer entertainment-focused retail destinations, traditional regional malls and enclosed outlet-oriented centers.

While Vornado and fellow REITs like

Simon Property Group

(SPG) - Get Report

,

General Growth

(GGP)

and

Macerich

(MAC) - Get Report

(along with Australian mall-owner Westfield) might be interested in the newer assets in Mills' portfolio, a different buyer could emerge for Mills' older, more outlet-focused properties.

One company that might be interested in the outlet properties is the Lightstone Group, a large private real estate investor with a significant portfolio of outlet centers. Lightstone has indirect tie-ins to the hedge funds that recently bought the 6.4% stake in Mills' stock.

The hedge funds, operated by Stark Investments, purchased the Mills stake for $145.6 million, according to a

Securities and Exchange Commission

filing last week. The investment firm, which is run by Brian Stark and Michael Roth (unrelated to Steve Roth), said it in its filing that Mills' stock "represents an attractive investment opportunity at this time" and added that Stark might decide in the future to "seek control or otherwise influence the management and policies" of Mills.

While Stark isn't known for its real estate expertise, lurking behind the surface of the fund is Louis Conforti, who was once chief financial officer of Prime Group Realty Trust, a formerly public Chicago-based office owner that was bought out by Lightstone.

Conforti most recently headed the Greenwood Group, a real estate investment management and advisory company that also operated a real estate hedge fund. Earlier this year, Conforti and the Greenwood team joined Stark. Conforti declined to comment for this story.

Conforti, after he left Prime Group, helped advise Lightstone on its $889 million purchase of the REIT. According to a

Chicago Tribune

article last year that cited anonymous sources, Greenwood also was an investor in Lightstone. (It's not clear if Greenwood was a general investor in Lightstone or if Greenwood was an investor for the Prime Group deal alone.)

Lightstone, which first entered the outlet-center arena with its $624 million purchase of Prime Retail in late 2003, has recently been busy raising money for a nonlisted $300 million REIT called Lightstone Value Plus REIT. The new REIT will own office, retail and other commercial properties. Recently, the nonlisted REIT announced its first potential purchase: an outlet store in St. Augustine, Fla., for $28 million.

If Lightstone, a noted value hunter, wanted to beef up its outlet exposure, it could make a run at Mills' older outlets, purchasing them for its new nonlisted REIT. Lightstone did not return a call seeking comment.

"Might Lightstone get involved -- who knows?" Vinocur wrote in an email. "I wouldn't rule anything or anyone out at this point." He says he remains just as confused as to Conforti and Stark's possible motives.

"With the likes of Vornado, Westfield, General Growth, Simon, Macerich, etc., circling, I find it hard to imagine how

Stark could end up more than a bit player -- unless they have a lot more capital at their disposal than I have been led to believe and they have a strategy for managing the assets -- or a player waiting in the wings to do so," Vinocur says.

Also last week, Fidelity Management & Research Company disclosed in an SEC filing that it had upped its stake in Mills to 5.73 million shares, a 10.2% stake. Fidelity is the second-largest Mills owner behind

Cohen & Steers

(CNS) - Get Report

, but neither is considered to be interested in buying the company.