Orchard Supply Hardware Stores has filed for Chapter 11 bankruptcy protection, court documents showed on Monday, with rival retailer Lowe's set to buy the majority of its assets for $205 million in cash.
Orchard, which was spun off by Sears Holdings Corp in late-2011, said it was carrying a high debt load and that it may not be in a position to make scheduled payments when the first tranche of its debt matures in December 2013.
"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. The ever present prospect of violating the company's leverage ratio covenants hampered many of its operational strategies," Orchard said in the court filing.
Management and the board determined that a sale of Orchard through a Chapter 11 process was the best possible outcome for the company and its stakeholders after exploring a range of alternatives, the company said.
The company, which generated revenue of $657 million in the 2012 fiscal year, listed total liabilities of $480.1 million and total assets of $441 million, according to a court filing.
Orchard said it has secured commitments for $177 million in debtor-in-possession (DIP) financing, which will help it to continue meeting its financial obligations throughout the Chapter 11 case.
Lowe's Acts as 'Stalking Horse' Bidder
The company said that Lowe's would act as a "stalking horse bidder" in an auction of Orchard's assets, serving as a minimum offer for the business which could still be topped by others.
If there are no competing bids that tops Lowe's offer, then the home improvement retailer will end up sealing the asset-purchase deal after obtaining bankruptcy court approval.
Lowe's said in a statement it would acquire no less than 60 of Orchard's 91 neighborhood hardware and garden stores in California and in addition to the $205 million cash price the acquisition would also include the assumption of payables owed to Orchard suppliers.
With 110 bigger Lowe's stores across California, the company said it plans to have Orchard operate as a separate, standalone business, retaining its brand and current 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, and will enable us to participate more fully in California`s economic recovery," said Lowe's chairman, president and chief executive Robert Niblock.
Orchard expects the bankruptcy process to be completed in about 90 days.
Shares in Orchard closed at $1.88 on Friday.
The case is in re Orchard Supply Hardware Stores, Case No. 13-11565, U.S. Bankruptcy Court, District of Delaware.