Orchard Supply Hardware Stores (OSH), a neighborhood hardware and garden store, Monday announced an agreement through which home improvement retailer Lowe's Companies, Inc. (LOW) would acquire the majority of its assets for $205 million in cash, plus the assumption of payables owed to nearly all of Orchard's supplier partners.
To facilitate the sale and restructure its balance sheet, Orchard has filed voluntary Chapter 11 petitions in the United States Bankruptcy Court for the District of Delaware.
San Jose, California-based Orchard had fiscal 2012 annual revenue of $657 million. It currently operates 91 neighborhood hardware and garden stores primarily located in densely populated markets in California.
Under the terms of the transaction, Lowe's would acquire at least 60 of these stores based upon further due diligence on the locations. On average, the Orchard stores include 36,000 square feet of selling space, compared to 113,000 square feet of selling space for an average Lowe's home improvement store. Lowe's currently operates 110 stores in California.
The transaction is expected to be consummated through a court-supervised process. The agreement with Lowe's will serve as the "stalking-horse bid" in the auction process.
Orchard expects to operate its overall business and the vast majority of its stores as usual during its financial restructuring and has secured commitments for $177 million in debtor-in-possession financing from Wells Fargo Bank.
The parties expect the transaction to close in about 90 days. As per the agreement, Lowe's would receive a break-up fee of 3 percent of the purchase price if it is not successful in acquiring the assets.
In addition, subject to court approval, an alternative bidder has to outbid Lowe's by a minimum of $12.0 million to be successful, representing $5 million in addition to the break-up fee and an expense reimbursement of $850,000.
Robert Niblock, Chairman, President and CEO of Lowe's, said, "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 added that Orchard's business model offers great potential but it has been burdened with high debt.
OSH closed down 11.7 percent on Friday at $1.88. LOW settled marginally lower at $41.16.
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