Will Lowe’s Overtake Home Depot In California?

8-lowesLowe’s (NYSE:LOW) furthered its expansion plans by agreeing to acquire struggling home improvement chain, Orchard Supply Hardware Stores (NASDAQ:OSH), for $205 million. Orchard filed for Chapter 11 bankruptcy protection on Monday, simultaneously announcing the deal with Lowe’s.

The Wall Street Journal reports that under the proposed deal, Lowe’s would acquire 60 of Orchard’s 91 California-based stores, along with an option to purchase the remaining 31. However, along with the purchase price of $205 million in cash, Lowe’s will also assume nearly all of Orchard’s $230 million of reported debt.

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The deal also hasn’t been finalized yet. Under the agreement, Lowe’s will serve as a stalking horse bidder in an auction of Orchard’s assets. This bidder agrees to buy a company’s assets for a price that other bidders can later top. If it ends up losing out on the auction, the stalking-horse bidder usually receives a fee.

Orchard, which was spun off by Sears (NASDAQ:SHLD) in 2012, has an extremely strong presence in California. Lowe’s has been looking to expand and take advantage of the housing recovery there, and believes it has found the perfect means by purchasing Orchard.

In addition to operating under the established Orchard brand, Lowe’s is encouraged by the fact that the average Orchard store holds only 36,000 square feet of selling space. Diversifying into a smaller-box format is gaining popularity as more and more sales move online. 36,000 square feet is miniscule compared to the average Lowe’s, which has about 113,000 square feet of selling space.

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Nationally, Lowe’s is the second-largest home improvement chain by revenue, but the company has been losing share to bigger rival Home Depot (NYSE:HD). Home Depot has 184 stores in quickly recovering California, according to its store locator. Lowe’s acquisition of 60 Orchard stores would put its California total at 170, with the option to take that number up over 200.

The Orchard acquisition is a definite power move from Lowe’s, but Home Depot could easily initiate a bidding war if it feels threatened by Lowe’s stronger presence in California.

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