Simon Property Group Inc. might soon scoop up one of the flashiest mall developers in the country-but that flash could be cause for worry.
If you want to know something about Mills Corp., which began considering a sale earlier this year, review plans for its enormous Xanadu project in the New Jersey Meadowlands.
The project broke ground in 2004 with a mind-boggling $1.2 billion budget. So far, Mills has signed just three tenants, and last month the company acknowledged Xanadu is over budget, without saying by how much. Mall insiders are abuzz the real tab will be $2 billion.
That's enough to make suitors nervous. Throw in an ongoing Securities and Exchange Commission accounting investigation, and the fact the company hasn't yet filed 2005 financials, and they really have the jitters.
Yet, as Simon Chief Financial Officer Stephen Sterrett told a Reuters reporter last month, "If it's $7 [billion] or $8 billion of assets in an industry that's substantially consolidated, you can't not pay attention to it."
Simon officials did not return calls seeking comment on Mills.
Mills, headquartered in Arlington, Va., owns 42 malls, many of them featuring tenants traditionally found in outlet malls. Many properties are larger than the malls dotting Indianapolis and the rest of the nation. And they have more sizzle, too, with attractions like glow-in-the-dark miniature golf and skateboard parks.
For years, it was a formula Wall Street loved. The properties performed well, and the stock soared.
The company has struggled of late, however, as colossal new malls performed worse than expected. The SEC probe also has weighed on the shares, as have the continuing delays in filing financials. Mills shares now trade for around $31, down more than 50 percent since August.
Forget cherry-picking prime properties. Mills says potential suitors have until June 13 to submit tentative bids to buy the entire company or to infuse it with capital.
Buying Mills would be well within the means of Simon, the nation's largest mall company. Simon has a stock market value of $17 billion. Buying Mills for $41 a share, a price analysts say it might fetch, would cost about $2.3 billion.
"We believe Simon may make a play for Mills," Stifel Nicolaus analyst David Fick said in a report. At last month's International Council of Shopping Centers convention in Las Vegas, he said, Simon and Mills officials spent several hours together and planned additional meetings.
Fick said Simon CEO David Simon historically has been skeptical of Mills' combining of outlet stores with entertainment. But he said Simon Property might be able to generate synergies between those properties and the outlet malls it acquired in 2004 by buying New Jersey-based Chelsea Property Group for $3.5 billion. He also noted that Mills in recent years has been buying traditional regional malls, Simon's core business.
Simon has another motive. It has become so big-it now owns all or part of 342 retail properties and has assets of $21 billion-that growing by a big percentage gets harder every year, Fick said in a report.
A big acquisition would come in handy to keep Simon growing at a rapid clip. David Simon over the years has proved himself a disciplined buyer who doesn't overpay. The big question in the case of Mills, which has drawn interest from some 30 suitors: Can he snag the prize for the right price?
Finish Line falters
Finish Line Inc. has had a tough run, which has pushed its stock down 38 percent over the past year. Now, a prominent investment-research firm says news for the company might get worse.
Chicago-based Zacks Investment Research Inc. on May 31 put Finish Line on its "stocks to sell now list," awarding it a "strong sell" rating. Only 5 percent of the companies Zacks follows are rated strong sell.
Why the dim outlook? Zacks points to the company's May 18 announcement that it expects to report a 7-percent to 9-percent decline in same-store sales for the fiscal first quarter, which ended May 27. It also scaled back expectations for fiscal 2007 profit, citing a "slowing footwear sales trend."
In response, five of the six analysts tracking Finish Line cut their annual profit projections. The consensus is now 90 cents per share, 40 percent below the forecast a month ago.