Orchard Supply Hardware Stores Corp (OSH), Lowe’s Companies, Inc. (LOW): Why This Bankruptcy Is a Black Eye for One Company and an Opportunity for Another

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This purchase would include at least 60 of its stores and much of its inventory. As the stalking-horse bidder, Lowes now has “first dibs” on the property: any rival bids mustexceed its current offer by $12 million or more. If the bankruptcy court accepts the bid, Lowes will become responsible for all of Orchard’s outstanding accounts-payable obligations as well as the longer-term debts that the court does not discharge.

Separately, Orchard has issued a release that advises its common-stock shareholders to divest their stakes due to the high likelihood of the stock’s de-listing and cancellation. It appears that this is designed to tamp down on HFT activities and speculative behaviors.

Potential Synergies and Other Positives for Lowes

If this deal goes through, it will create some key opportunities for Lowes. For starters, the company will gain an additional foothold in California. Although Lowes already has over 100 stores in the state, Orchard’s properties tend to occupy prime parcels in affluent, densely populated neighborhoods. As such, they are frequented by contractors and subcontracting firms that repair old houses for sale or lease. Now that the state’s housing market is in full recovery mode, these business have been very busy. In fact, Home Depot posted solid first-quarter numbers on the strength of the rebounding housing market. Lowes would like a piece of that action.

Another important synergy may arise out of this deal: If everything goes according to plan, Lowes may be able to obtain the rights to key Sears tool brands at a significant discount. This would provide it with a tremendous competitive advantage beyond Orchard’s California home market.

Possible Plays and Long-Term Outlook

In sum, this deal provides Lowes with the chance to secure several dozen hardware stores in prime markets at a significant discount. While it is not yet a done deal, no other bidders have emerged to challenge the Charlotte-based hardware company for Orchard’s assets. Although Lowes might eventually have to invest in expansion and remodeling efforts at these stores, investors should assume that this deal will be a net positive for the company. We will be looking at Lowes and other great special situations for potential entry points.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe’s (NYSE:LOW). Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Why This Bankruptcy Is a Black Eye for One Company and an Opportunity for Another originally appeared on Fool.com is written by Mike Thiessen.

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