Aug. 25 (Bloomberg) -- Lowe’s Cos., the second-largest U.S. home-improvement chain, will team with Woolworths Ltd. to enter Australia’s A$24 billion ($20 billion) hardware market, betting on an economy where home-building approvals rose by the most in four years.

The venture today agreed to buy Danks Holdings Ltd., the nation’s second-largest hardware distributor, for A$87.6 million in the first step of a five-year plan to open 150 stores. Lowe’s will own one-third and Woolworths, Australia’s biggest retailer, the rest, the Sydney-based company said today.

Lowe’s, whose earnings fell two straight years as U.S. housing starts dropped to a record low in April, moves into a country where permits for building or renovating dwellings rose by 9.3 percent in June, spurred by borrowing costs at a half- century low and government grants. The unnamed venture will take on national leader Wesfarmers Ltd., whose 233-store Bunnings chain has annual sales of A$5.8 billion.

“Taking on the partner with expertise reduces the risk for Woolies and increases the risk for Wesfarmers,” said William Seddon, who helps manage about $300 million in assets at White Funds Management in Sydney. “A successful entry reduces the potential upside for Bunnings.”

Woolworths shares rose 2.2 percent to A$28.63 at the 4:10 p.m. market close in Sydney for a gain of 7.4 percent this year. Wesfarmers shares fell 3.5 percent to A$24.80.

Home Depot Struggles

The first outlet is scheduled to open in late 2011, Woolworths said. The amount of Lowe’s investment wasn’t disclosed.

Mooresville, North Carolina-based Lowes, with 1,688 stores in the U.S. and Canada, and larger rival Home Depot Inc. are hurting as consumers cut back on large remodeling projects during the U.S. housing slump.

Atlanta-based Home Depot, with more than 2,200 stores in North America, Guam and China, has had three straight years of falling earnings.

The S&P/Case-Shiller home-price index, which tracks prices in 20 major U.S. cities, has posted one monthly gain since July 2006. Yet Australian home-loan approvals rose in June for a record ninth consecutive month, the statistics bureau said.

The venture between Lowe’s and Woolworths will be the biggest challenge to Bunnings since Wesfarmers cemented its position as the market leader by paying A$3 billion in 2001 for Howard Smith Ltd. and its second-ranked BBC Hardware chain.

Billions in Profits

Bunnings sells power tools, paint, timber, plumbing, flooring and outdoor furniture. The company estimates that the Australian home improvement and outdoor living market is worth A$36 billion and has grown faster than gross domestic product for two decades. Lowe’s estimated the hardware market to be worth A$24 billion in its statement today.

The venture with Lowe’s extends the competition between Woolworths and Perth-based Wesfarmers, which owns the nation’s top two grocery, liquor and discount department store businesses.

Woolworths grocery and liquor units lead its rival in earnings and sales. Bunnings is Wesfarmer’s most profitable retail unit, with profit margins of 11.2 percent compared with about 3 percent in its Coles supermarkets.

“The industry profit pool is over A$2 billion,” Craig Woolford, an analyst at Citigroup Inc. in Sydney, said in a note to clients today. “Existing industry returns are high and there are few competitors in the big box format. The challenge will be securing high quality sites.”

Woolford rates Woolworths and Wesfarmers as “hold.”

Following Costco

The Danks purchase gives Woolworths and Lowe’s supply agreements with 583 Home Timber & Hardware outlets and another 939 independent outlets.

The companies secured 12 sites and are negotiating for 15 more with plans to open stores larger than 10,000 square meters (107,600 square feet), similar in size to Bunnings Warehouse properties.

“We can improve the pricing, product range and experience for customers,” Woolworths Chief Executive Officer Michael Luscombe said in the statement. “At the moment, the sector is dominated by one major big box player so there is a real opportunity for increased competition.”

Woolworths, with more than 800 supermarkets across Australia as well as “Big W” discount department stores, competes with Perth-based Wesfarmers’ 700 Coles grocery outlets and Kmart and Target discount chains.

Lowe’s entry into Australia comes a week after Costco Wholesale Corp., the largest U.S. warehouse club, opened its first store in the nation in Melbourne, the second-largest city.

To contact the reporters on this story: Robert Fenner in Melbourne rfenner@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net

Last Updated: August 25, 2009 05:47 EDT