June 17 (Bloomberg) -- Lowe’s Cos., the second-largest U.S. home-improvement retailer, agreed to pay $205 million to add at least 60 Orchard Supply Hardware stores in California after Orchard filed for bankruptcy protection.
The acquisition will provide the retailer with a smaller store format and give it access to new customers in California, where it already operates 110 outlets, Lowe’s said today in a statement. In addition to the cash purchase price, it will assume amounts owed to almost all of Orchard’s supplier partners.
Lowe’s, based in Mooresville, North Carolina, said it wants to add stores in California as the housing market recovers. The chain operates half as many California stores as Home Depot Inc., helping explain why its comparable-store sales trailed its larger rival in the first quarter, Chief Executive Officer Robert Niblock has said.
“This is a fairly unique opportunity” because real estate prices and local zoning restrictions limiting the size of stores make expanding into cities such as Berkeley and Santa Cruz difficult to justify financially, Niblock said today by telephone.
Lowe’s rose 0.5 percent to $41.37 at the close in New York. The shares have climbed 16 percent this year compared with a 15 percent gain for the Standard & Poor’s 500 Index.
Orchard stores average about 36,000 square feet, compared with about 113,000 square feet for Lowe’s locations, Niblock said.
Orchard, which has 91 hardware and garden stores, listed assets of $441 million and liabilities of $480.1 million in Chapter 11 papers filed in U.S. Bankruptcy Court in Delaware today. The company blamed bankruptcy on declining sales caused by competition from larger stores like those belonging to Lowe’s and Home Depot.
Lowe’s said the offer will act as a “stalking horse bid” in an auction process, meaning it’s an agreement between the two parties for San Jose, California-based Orchard to try to attract other bids.
Lowe’s will get a break-up fee of 3 percent of the purchase price if it fails to acquire Orchard’s assets, according to the statement. An alternative bidder must outbid the retailer by at least $12 million.
Orchard’s other stores will be closed in going-out-of-business sales conducted by outside liquidators.
The bankruptcy case is In re Orchard Supply Hardware Stores Corp., 13-11565, U.S. Bankruptcy Court, District of Delaware.
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