NEW YORK (
Orchard Supply Hardware Stores
filed for Chapter 11 on Monday with plans to sell its business in an auction led by a $205 million bid from competitor Lowe's Cos.
Orhcard Supply was losing 15% to $1.79 in mid-day trading. Lowe's was slipping 0.3% to $41.24.
The San Jose, Calif., operator of a neighborhood hardware and garden store chain and affiliates Orchard Supply Hardware LLC and OSH Properties LLC submitted petitions in the U.S. Bankruptcy Court for the District of Delaware in Wilmington.
Judge Christopher S. Sontchi is set on Tuesday to consider first-day motions, including joint administration of the cases, interim use of about $177 million in debtor-in-possession financing and the scheduling of a hearing on proposed bidding procedures.
Lowe's has offered $205 million in cash plus the assumption of payables owed to nearly all of Orchard's supplier partners, according to a Monday statement from Orchard. The Mooresville, N.C., home improvement retailer has agreed to acquire at least 60 of Orchard's 91 stores. The debtor anticipates completing the sale in 90 days.
"We believe that Lowe's offer is a validation of Orchard's unique market opportunity and of our strategy to capture it," Orchard president and CEO Mark Baker said in the statement. "We are confident the steps we are taking today will allow us to achieve our financial and operational goals and are certain we are making the right decision both for our business and for the many individuals and families who depend on Orchard."
Orchard said on completion of the sale, it would operate as a separate, standalone business, retaining its brand, management team and associates. The deal with Lowe's would allow it to benefit from having a financially stable parent while giving Orchard the ability to reposition itself for growth.
In its own statement, Lowe's said it believed the bankruptcy reorganization would allow Orchard to address its burdensome debt and become a profitable company.
"Orchard's neighborhood stores are a natural complement to Lowe's strengths in big-box retail, offering smaller-format hardware and garden stores catering to the needs of local customers," Lowe's chairman, president and CEO Robert A. Niblock said in a company statement Monday. "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."
Lowe's has more than 1,750 stores in the U.S., Canada and Mexico. Revenue in fiscal 2012 totaled $50.5 billion.
Orchard wants to hold an Aug. 14 auction of its assets, with Lowe's as the stalking-horse bidder.
Under the proposed bidding procedures, competing bids of at least $217 million would be due Aug. 9. Should Orchard receive any bids, offers at auction would have to further increase in increments of at least $2 million. A sale hearing would follow on Aug. 20.
Should Lowe's lose the auction, it would be entitled to up to $850,000 in expense reimbursement and a $6.15 million breakup fee. To fund operations through the sale, Orchard has lined up debtor-in-possession financing from its prepetition lenders.
The DIP comprises a $164.33 million revolver, of which $124.33 million would be available with interim approval, and a $12 million term loan, half of which would be available with interim approval. Wells Fargo Bank NA is the administrative agent on the revolver, and Gleacher Products Corp. is the agent on the term loan.
Orchard, meanwhile, also wants to close eight underperforming stores through going-out-of-business sales. Orchard seeks to auction the right to perform the liquidation sales and has lined up a stalking-horse bid from a joint venture between Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC, which would guarantee Orchard would recover 72% of the cost value of the merchandise.
Competing liquidation offers would be due June 25, and Orchard would conduct the auction on June 27. The sale hearing would be June 28. Should Orchard choose a different liquidator, the JV would be entitled to a $300,000 breakup fee.
Sontchi is scheduled to consider the motion on Tuesday.
Orchard was founded in 1931 as a purchasing cooperative, according to a declaration by Chris D. Newman, the company's executive vice president and CFO. The company, which focuses on paint, repair and backyard needs -- having exterior nurseries and garden space at its locations -- since has grown to 89 stores in California and two in Oregon. Of the stores, Orchard leases 82 and owns three. The remaining six are ground leased, where the debtor owns the buildings. Orchard also has a distribution center in Tracy, Calif.
Orchard has had a number of owners over the years, including W.R. Grace & Co., which purchased it in 1979 and sold it to Wickes Holdings LLC in 1986. (W.R. Grace itself filed for Chapter 11 on April 2, 2001, in Delaware. The company must overcome appeals to confirmation of its plan before it can emerge from bankruptcy.)
In 1993, Orchard launched an initial public offering and later acquired seven former Builders Emporium stores. Sears Holdings Corp. then purchased the company in 1996 and owned it until 2011, when it spun off Orchard into its own public company. Ares Corporate Opportunities Fund, meanwhile, had purchased 20% of Orchard on Nov. 23, 2005.
While the company's number of stores doubled under Sears' ownership, between 2007 and 2010 sales fell about $200 million, to $650 million from $850 million. Newman said the drop was due to the economic decline, competition from Home Depot U.S.A. Inc. and Lowe's and its highly leveraged capital structure.
In 2011 Orchard redesigned some of its stores, leading to a 15% increase in sales in the remodeled locations, but the company's debt structure halted it from remodeling more locations, as it could only redesign stores with landlord financing. In fiscal 2012, Orchard had revenue of $657 million.
Orchard began restructuring talks with lenders before the Sears spinoff, ultimately determining to pursue a sale under Section 363 of the U.S. Bankruptcy Code. Orchard owes $107 million on a senior secured revolver and $129 million on a senior secured term loan that is senior to the revolver.
The debtor in December 2006 obtained a five-year $130 million senior secured revolver from Wells Fargo. The loan was reduced to $120 million on Jan. 29, 2010, and later reduced to $100 million. On Oct. 17, 2012, though, the loan was increased back to $120 million and Orchard added a $7.5 million first-in, last-out tranche. On Feb. 11, the loan was again increased to $145 million through a new $17.5 million last-in, last-out tranche.
The revolver loan matures on the earlier of 90 days before the senior secured term loan and Oct. 17, 2017. Orchard also obtained the $200 million term loan in December 2006. Orchard paid down $127 million of the loan last year.
The loan has since been split into two tranches: the first matures on Dec. 21 and had $54.7 million outstanding as of Monday, and the second matures Dec. 21, 2015, and had $74.3 million outstanding. Gleacher is the administrative and collateral agent on the term loan.
The DIP would roll up some of the prepetition debt and also includes new money. The DIP revolver would mature on the earlier of one year from the effective date of the loan or 10 days after sale approval. The term loan would mature on the earlier of 120 days after the petition date or 10 days from sale approval.
The revolver bears interest at a base rate plus 75 basis points, although certain advances would bear interest at the base rate plus 300 basis points. The term loan would accrue interest at a base rate plus 175 basis points or Libor plus 9.25%, with a 0.75% Libor floor.
The revolver also has a 0.5% commitment fee, a $1.1 million closing fee and a $75,000 annual administrative agent fee. The term loan has closing fees of $53,438 and $301,143 as well as a $45,000 administrative fee and a $75,000 syndication fee.
There is also a $20,000 supplemental term agent fee. In its petition, Orchard listed $441.03 million in assets and $480.14 million in liabilities as of May 4.
Orchard owes $40.9 million in trade debt. Its largest unsecured creditors are Kawahara Nursery Inc. (owed $1.47 million), Scotts Co. ($910,483.08), Milwaukee Electric Tool Co. ($790,195.91), Richard W. Wilson ($756,693.36) and Hillman Group Inc. ($745,773.10).
Calls to Orchard's media consultant at FTI Consulting Inc. and debtor counsel Stuart M. Brown and Richard A. Chesley of DLA Piper LLP (US) were not immediately returned Monday.
Moelis & Co. LLC is Orchard's investment banker. A&G Realty Partners LLC is its real estate adviser. Goldman, Sachs & Co. is financial adviser to Lowe's, while Hunton & Williams LLP is its legal adviser.
Written by Aviva Gat in New York