Ares-Backed Orchard Supply Files Chap. 11

  • Less than two years after spinoff from Sears
  • Ares holds nearly 20 percent of the company
  • Lowe’s a stalking horse bidder

Rival retailer Lowe’s Cos said it would buy at least 60 of Orchard Supply’s 91 neighborhood hardware and garden stores in California for about $205 million and also assume payables owed to nearly all of Orchard Supply’s suppliers.

Orchard Supply said in a court filing that it was carrying a high debt load and that it may not be able to make payments when the first tranche matures in December. The company, which generated revenue of $657 million in fiscal 2012, listed total liabilities of $480.1 million and total assets of $441 million.

“The company’s substantial debt due, in part, to significant recapitalization dividends paid to Sears, made it difficult, if not impossible for the company to right itself,” Orchard Supply said. Management and the board determined that a sale of Orchard Supply through a Chapter 11 process was the best possible outcome for the company and its stakeholders, Orchard Supply said.

The company has secured commitments for $177 million in debtor-in-possession financing, which will help it meet financial obligations through the bankruptcy. Orchard Supply said Lowe’s would act as a “stalking horse bidder,” setting a minimum offer for the business, which could still be topped by others.

In theory, Ares Management, known as an investor in distressed companies, could make a bid for Orchard Supply. Sears sold the 19.9 percent stake to the buyout shop in October 2005 for $58.7 million. In conjunction with the deal, Orchard Supply was to issue approximately $405 million in debt, peHUB reported at the time, and the agreement gave Ares Management a three-year option to buy another 30-plus percent stake and majority control. It appears, however, that the firm never took advantage of that opportunity; Orchard Supply’s latest annual report identified an Ares Management affiliate as its largest shareholder, still with just less than 20 percent ownership. Ares Management did not respond by deadline to a request for comment from Buyouts.

If there are no competing bids, Lowe’s will acquire Orchard Supply’s assets after obtaining bankruptcy court approval. Lowe’s plans to operate Orchard Supply as a standalone business, retaining its brand and management.

“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,” said Robert Niblock, Lowe’s chairman, president and chief executive.

Orchard Supply said it expects the bankruptcy process to be completed in about 90 days.

“This transaction is both a smart and modest capital investment to attack a critical real estate shortcoming that Lowe’s has relative to Home Depot,” Janney Montgomery Scott LLC analyst David Strasser wrote in a note.

Lowe’s lacks conveniently located stores in key metro markets, and this deal could bridge that gap, particularly in markets like California, Strasser added. The analyst has a “neutral” rating on Lowe’s stock.

Sakthi Prasad is a correspondent for Reuters in Bangalore; additional reporting by Siddharth Cavale and Steve Bills.