MOORESVILLE, N.C. Lowe's plans to expand its California presence with an acquisition of Sears spinoff Orchard Supply Hardware Stores for about $205 million in cash.
Orchard Supply filed a voluntary Chapter 11 bankruptcy petition on Monday, so the offer from Lowe's will become the "stalking horse" bid for an auction of Orchard's assets. Such a bid sets the floor for an auction process that lets competitors make better offers.
The California market is key, since it has been a strong market for home improvement retailers recently. In its most recent earnings report, Lowe's (LOW) reported net income that rose 3 percent but missed expectations, hurt by a rainy and cool spring. However, its larger rival Home Depot Inc. (HD), with a bigger presence in California, reported better-than-expected results.
"This transaction is about the convenience deficit that Lowe's currently has relative to Home Depot in key metro markets around the U.S.," said Janney Capital Markets analyst David Strasser. "This acquisition would help immediately in California, and possibly set up a strategy for other key metro markets."
The Lowe's bid must survive the auction and receive bankruptcy court approval. The companies expect the deal to close in about three months.
Orchard Supply filed its bankruptcy petition in the U.S. Bankruptcy Court for the District of Delaware.
Mooresville, N.C.-based Lowe's Cos. Inc. said Monday it will acquire at least 60 of Orchard's 91 stores, and alternative bids must top Lowe's offer by at least $12 million. Lowe's also will assume responsibility for money owed to nearly all of Orchard's suppliers.
Orchard stores are smaller than Lowe's locations, with about 36,000 square feet of selling space compared with 113,000 square feet for Lowe's. The San Jose, Calif., company was spun off from Sears Holdings Corp. (SHLD) in January 2012, and most of its locations are in densely populated California markets.
Lowe's already runs 110 stores in California. It plans to have Orchard operate as a separate, standalone business, retaining the Orchard brand. Lowe's chairman and CEO Robert A. Niblock said in a statement that Orchard's business has potential but also has been burdened with high debt.
"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," Niblock said.
Lowe's shares rose 21 cents to close at $41.37, closer to the high end of the stock's 52-week range between $24.76 and $43.84. The stock has climbed 16 percent so far in 2013.