Home-improvement retailer Lowe’s Cos. has agreed to buy Orchard Supply Hardware Stores Corp. for $205 million, throwing a lifeline to struggling Orchard while furthering its own expansion plans.
On Monday, Orchard filed for Chapter 11 bankruptcy protection, spelling out the proposed the deal with Lowe’s at the same time.
Under the agreement, Lowe’s would acquire at least 60 of Orchard’s 91 stores, plus an option to buy the rest.
The hardware-and-garden chain, based in San Jose, Calif., employs about 5,400 people on the West Coast and carries about $230 million in debt. It was spun off by Sears Holdings Corp. in 2012. In October, Orchard said it had started working with advisers on strengthening its financial position.
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The deal calls for Lowe’s to serve as a so-called stalking-horse bidder in an auction of Orchard’s assets. Such a bidder agrees to buy assets for a certain price that others can later top. The opening bidder usually gets a fee if it ends up losing at the auction.
Orchard also has secured commitments for $177 million in so-called debtor-in-possession financing, the people said, led by current lender Wells Fargo & Co., according to people familiar with the situation. The financing will help the chain meet its obligations while in Chapter 11 proceedings.
If completed, the deal would help Lowe’s expand its footprint in California, where the majority of Orchard’s stores are located, the people said. Currently, Lowe’s has 110 stores in California, but management has been looking to benefit from the housing recovery there.
Lowe’s also would assume responsibility for money owed to nearly all of Orchard’s vendors, according to people familiar with the situation.
The deal would help Lowe’s diversify into a smaller-box format, a strategy that other big-box retailers are trying as more sales move online. Orchard stores average 36,000 square feet of selling space. Lowe’s stores average about 113,000 square feet of selling space. Lowe’s plans to keep the Orchard name and operate the stores independently, one of the people said.
Lowe’s is the world’s second-largest home improvement chain by revenue. But in recent years, the company, based in Mooresville, N.C., has lost share to bigger rival Home Depot Inc.
For the first quarter, Lowe’s reported net earnings of $540 million, up 2.5% from a year earlier. Sales for the quarter fell 0.5% to $13.1 billion.
After The Wall Street Journal reported in mid-April that Orchard had hired restructuring lawyers at DLA Piper, the stock fell more than 40% to $2.14. The shares closed Friday at $1.88.
Since mid-April, Orchard has continued to hold calls with suppliers and lenders but increasingly explained that it mostly faced balance-sheet problems, another person familiar with the matter said. The chain is rolling out a new store design, including better aisle navigation and a more-centralized customer-service area, which has so far reached about a dozen outlets. It also recently opened some new stores, including two in Oregon, a new market for the company.
Date: June 17, 2013