Lowe’s Companies, Inc. (LOW) has entered into a asset purchase agreement with Orchard Supply Hardware Stores (OSH) in which Lowe’s, the world’s second largest home improvement retailer, will acquire the majority of Orchard’s assets for about $205 million. Lowe’s will also assume Orchard’s payables to suppliers.
To facilitate the sale and restructure its balance sheet, San Jose, California-based Orchard has voluntarily filed for Chapter 11 bankruptcy protection. The agreement will serve as the “stalking horse bid” in the auction and bankruptcy process, meaning that others can come in and offer a higher bid to buy the assets and Lowe’s will receive a fee if it ends up losing the auction. According to Lowe’s, an alternative bidder must offer at least $217 million, which includes a break-up fee and expense re-imbursement.
In the deal, Lowe’s will acquire a minimum of 60 of Orchard’s 91 neighborhood hardware and garden stores, mostly located in heavily populated areas of California. Those 91 stores, which are focused on paint, repair and backyard items, generated $657 million in revenue last year for Orchard. In contrast, Lowe’s reported sales of $50.5 billion in 2012. It is expected that the vast majority of the Orchard stores will operate as usual during the bankruptcy and sale.
Upon receiving all necessary approvals and the completion of the sale, Orchard will operate as a separate business, keeping its brand, management team and associates, with Lowe’s serving as the parent company.
“The steps we are taking today allow us to definitively address our balance sheet issues in order to fully execute on our brand transformation and growth strategies. We believe that Lowe’s offer is a validation of Orchard’s unique market opportunity and of our strategy to capture it,” said Mark Baker, president and chief executive of Orchard.
Debt-riddled Orchard was previously owned-by Sears Holdings Corp. (SHLD) and spun-out in late 2011.
“Orchard’s neighborhood stores are a natural complement to Lowe’s strengths in big-box retail, offering smaller-format hardware and garden stores catering to the needs of local customers. Strategically, the acquisition will provide us with immediate access to Orchard’s high density, prime locations in attractive markets in California, where Lowe’s is currently underpenetrated,” said Mr. Robert A. Niblock, Chairman, president and chief executive of Lowe’s. Lowes currently operates 110 stores across California.
Shares of Orchard have been crushed over the past year, dropping from around $20 each last June to bottoms around $1.45 in recent months. Shares are trading ahead on Monday morning by about 9 percent at $2.05 after jumping to $2.55 at the opening bell. Shares of Lowe’s are up by three-quarters of a percent at $41.46 and are ahead by more than 50 percent in the past year.