Published 6 February 2007
Listed US mall owner & developer Simon Property Group has been joined by a hedge fund to challenge Canadian property investor Brookfield Asset Management Inc to acquire mall owner The Mills Corp on its deathbed.
Mills was active & seemingly strong until 2004, 12 years into its era as a listed reit. In February 2005 it said it was restating its accounts back to 2002, and last November it said it would report writeoffs equal to its entire capital account. It faced delisting from the New York Stock Exchange for not getting the restatements done (but released a report on them on 7 January) and it was facing bankruptcy until Brookfield, as part of its 17 January takeover proposal, acquired the $US1 billion of debt held by the Goldman Sachs Mortgage Co.
The day before Mills’ annual meeting, held on 29 December, Goldman Sachs renewed the remaining $US1 billion of its senior debt facility until 31 March, but on tough terms. These included bumping up the interest rate by ½% to 2.75% over one-month libor, signing a refinancing of some other debts by 15 January, and a draft asset sales programme to be drawn up by 15 February.
In December, Mills was contemplating selling enough assets to pay off the Goldman Sachs loan, selling the whole company or recapitalising. In August it had agreed the $US981 million sale of 3 non-US assets – in Canada, Scotland & the Madrid Xanadu in Spain – to its 50% partner in the first 2 of those, Ivanhoe Cambridge Inc, for a net $US500 million gain, but still faced bankruptcy.
Mills led the US entry to European mall development with its Xanadu project in 2003 and it also had a long-term European partner in US properties, leading German private syndicator the Kan Am Group, which began investing in the US with Mills’ predecessor, Western Development, in 1984 and was the largest shareholder when Mills listed in 1994. Kan Am paid out many of its Mills syndicate investors in 2003-04 and sold out of a major investment, Ontario Mills, in 2004.
The Brookfield agreement has been Mills’ saviour. Apart from the increasingly onerous Goldman Sachs loan conditions, the SEC (Securities & Exchange Commission) detail on the November refinancing of Mills’ Meadowland Xanadu project in New Jersey showed other lenders also saw the opportunity to feed on injured prey: For some releases & indemnities, Mills issued $US175 million of subordinated notes to Colony Capital Acquisitions LLC & some Kan Am syndicates for $US150 million.
The offers
Brookfield offered $US1.35 billion (plus acceptance of $US6 billion of debt) at $US21/share for Mills, which the Mills board has accepted. Simon & its partner, Farallon Capital Management LLC, offered $US1.56 billion cash (also plus the debt) at $US24/share yesterday, and said they would make a tender offer to speed things up. By comparison, the requirement for shareholder meetings on the Brookfield deal could take up to 6 months because of the delays in presenting accounts.
Mills’ shares closed at $US25.87 yesterday, up $US3.70 on the day.
The Simon deal has another advantage through its partner, Farallon, a San Francisco hedge fund which holds 10.9% of Mills, making it the largest shareholder.
The players
Everybody’s big in this exercise.
Mills, despite its asset sales, is still a large player in US retail. It still owns 38 US retail properties containing 4.4 million m².
Simon, the biggest US mall owner, has an interest in 286 US properties totalling 18.7 million m² and has expanded into Europe & Asia, with an interest in 53 European centres & 5 in Japan. Its market capitalisation is $US25.8 billion. Simon announced net annual profit on 2 February of $US486 million, up 21%, funds from operations up 8.9% to $1.54 billion.
Farallon manages $US26 billion of investments for institutional investors such as university endowments, foundations & pension plans, typically buying assets at a significant discount to replacement cost or for development to a higher use. It invests in restructuring companies undergoing significant changes such as spin-offs, recapitalising, litigation or strategic realignment, or that undervalued & expected to appreciate.
Brookfield has $US50 billion of assets under management, including the former O&Y portfolio of commercial property, mostly in New York, Toronto & Canary Wharf, London. Its other assets are in the hydro-electric generation & infrastructure sectors and timberlands. Brookfield is also now bidding for control of Australian property group Multiplex.
Earlier stories:
23 October 2005: Brookfield completes O&Y takeover
2 August 2005: Simon & Morgan Stanley join Shenzhen investment arm to develop Chinese malls
18 October 2004: Taubman loses management contracts on 9 centres while buyer Mills looks at productivity gains
9 October 2003: Taubman defeats Simon/Westfield takeover bid
Websites: Brookfield
Mills
Simon Property Group
Farallon Capital Management
Kan Am Group
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Attribution: Mills, Brookfield, Simon, Farallon, Kan Am, SEC, story written by Bob Dey for this website.
