Mall owner Simon Property Group and Farallon Capital Management, the largest shareholder of embattled Mills ,offered on Monday to buy Mills for $1.56 billion, topping a $1.35 billion offer from Brookfield Asset Management.
The new bid for Mills is valued at $24 a share. Last month, Canada-based Brookfield agreed to buy Mills for $21 a share.
Simon, the largest U.S. shopping center owner, and hedge fund Farallon said their offer would pay Mills shareholders at east six months before the publicly announced expected closing date for the Brookfield deal.
Friedman Billings Ramsey analyst Paul Morgan said the Simon deal would be superior because Simon's size and the quality of its portfolio make its properties desirable to retailers.
"The large portfolio owners have a natural advantage," he said, while Brookfield would be new to the field.
Mills has lost about half its stock market value during the past year and faces a U.S. Securities and Exchange Commission investigation into its accounting.
Its accounting problems led to firings, layoffs, top management resignations and the SEC probe.
Despite Mills' financial troubles, many of its malls are highly valued, as new ones are scarce because they require locations in densely populated areas where local permitting and approval processes are difficult to navigate.
Mills owns 39 retail malls, including Sawgrass Mills and The Falls in Florida, Stoneridge Mall in San Francisco, The Shops at Riverside in New Jersey and Virginia's Potomac Mills.
Funds managed by Farallon currently own about 10.9% of Mills' outstanding shares. Stark Master Fund, another hedge fund with a 10% position in Mills, also is supporting the bid. Simon has obtained an option to buy Stark's Mills shares at the offer price, effective on the Simon group entering into a merger agreement with Mills.
A rival bid was not unexpected, and the stock has been trading above the Brookfield price since Jan. 26.
"The significant amount of capital seeking exposure to real estate would suggest a rival buyer for Mills could be around the corner, particularly given the relatively low break-up fee and Brookfield's surprising emergence as the winning bidder," Green Street Advisor's analyst Jim Sullivan wrote in a research note last week.
Sullivan had expected other bidders to enter after the company filed its long-expected financial results for 2005 and restated results going back to 2000. Mills has yet to issue those results.
A person familiar with the deal said an increase in the $40 million break-up fee to $65 million on March 1 precipitated the timing of the Simon/Farallon offer.
A spokesman from Westfield American , another oft-cited expected bidder, declined to comment on whether it also would throw its hat into the ring for Mills.
"Westfield does not comment on rumor or speculation, spokeswoman Catherine Dickey said.
Israeli Gazit Globe, which holds about 9.7% of Mills stock, according to a recent filing with the SEC, has two seats on the Mills board and recently offered to recapitalize the company instead of having it sold.
Gazit Globe wanted control of Mills because of its highly valued property portfolio.
"Most of it is irreplaceable," Gazit Chairman Chaim Katzman told Reuters in a December interview. "It doesn't matter what you're going to do; you cannot reproduce another Sawgrass
Mills, another Potomac Mills."
Simon owns 286 malls, outlet centers and other shopping centers in the U.S., Japan, Mexico and Europe.
Representatives from Simon, Farallon and Gazit Globe were not available for immediate comment.
Analysts said a Mills purchase would likely be structured as an off-balance-sheet transaction to shield Simon from potential legal problems related to Mills' accounting.
Mills has faced the threat of bankruptcy should it fail to meet a March 31 deadline to repay a $1.1 billion loan from Goldman Sachs.
Brookfield has agreed to provide Mills with debt financing until completion of the merger and to assume Mills' loan. Simon and Farallon would replace Brookfield's debt financing, said the person familiar with the deal.
The winning bidders would have to assume a $100 million loan from J.P. Morgan and a $175 million loan from Colony Capital. Mills also has about $1 billion in preferred shares.
Mills' properties carry $3.5 billion of debt in complicated ownership structures.