Lowe’s aims to acquire Orchard Supply Hardware amid OSH bankruptcy

Orchard Supply Hardware is filing for Chapter 11 bankruptcy but already has a waiting rescuer – larger competitor Lowe’s Companies Inc.

Lowe’s is offering to buy most of the San Jose company’s assets for $205 million in cash – including at least 60 of its stores – and assume the payables owed to most of the smaller chain’s suppliers.

Under the acquisition agreement, Orchard would be allowed to hold onto its brand, continue operating its stores as a standalone business and retain its management team and employees.

The home improvement chain was spun off from former parent Sears Holdings less than two years ago and blames heavy debt accrued during the retailer’s ownership for its current financial woes.

Orchard -- which focuses on hardware, garden goods and paint -- said it hopes to complete the bankruptcy process within 90 days. It said it has filed court motions asking for permission to pay its employees and honor gift cards and membership club benefits.

In morning trading in New York, Orchard stock was up as much as 35.6% to $2.55 a share after tanking throughout the year. Lowe’s got a much smaller 1.5% boost to $41.79 a share.

Lowe’s will serve as a so-called stalking horse bidder, making an offer for Orchard that can be topped by other suitors at an auction later this summer.

But interested buyers must outpace Lowe’s price by $12 million, according to the agreement. If they do, Lowe’s gets a 3% break-up fee.

Orchard is attractive because its local neighborhood feel, Lowe’s chief executive Robert A. Niblock said in a statement.

Orchard stores feature an average of 36,000 square feet of interior space and 8,000 square feet of outdoor nurseries and gardens. Lowe’s, by comparison, are 113,000 square feet on average.

Of Orchard’s 91 stores, all but two are in California. Mooresville, N.C.-based Lowe’s has 1,750 stores in North America, but just 110 of them are in California.

During the 2012 fiscal year, Lowe’s pulled in $50.5 billion in sales, compared to the $657 million in revenue earned by Orchard.

“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 under-penetrated, and will enable us to participate in a larger way in California’s economic recovery,” Niblock said.