Spun off less than two years ago from Sears Holdings, local hardware store operator Orchard Supply Hardware (NASDAQ: OSH) sought bankruptcy protection this morning, citing the substantial dividends it was required to pay its former parent as a partial cause for its demise, according to a Reuters report. DIY big-box retailer Lowe's (LOW +3.47%) has stepped in as a "stalking horse bidder," setting a floor for the price others could bid on its business.
Lowe's announced this morning it entered into an asset purchase agreement with Orchard Supply to acquire the majority of its assets for approximately $205 million in cash, plus the assumption of payables owed to nearly all of the hardware store chain's suppliers.
Orchard Supply, which generated $657 million in revenues in 2012, operates 91 stores in California, of which Lowe's said it would acquire at least 60. On average, the stores include approximately 36,000 square feet of selling space, compared to 113,000 square feet of selling space for an average Lowe's store. Lowe's currently has 110 stores of its own operating in the state.
Noting that Orchard Supply had been burdened with a high level of debt that would be addressed through the Chapter 11 filing, Lowe's CEO Robert A. Niblock said: "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, and will enable us to participate more fully in California's economic recovery."
Under the terms of the agreement, Lowe's will receive a break-up fee of 3% of the purchase price if it's not successful in acquiring Orchard's assets. In addition, if another bidder makes an offer, it must outbid Lowe's by a minimum of $12 million, representing $5 million in addition to the break-up fee and an expense reimbursement of $850,000.
Goldman Sachs is acting as financial advisor to Lowe's, while Hunton & Williams is acting as legal advisor. The transaction is expected to be completed through a court-supervised process under Section 363 of the bankruptcy code and is subject to an auction and bankruptcy court approval.
Orchard said it will operate as a separate, standalone business at the completion of the sale process, retaining its brand, management team and associates.
