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August Auction Is Set for Orchard Supply Hardware Stores

Bankruptcy Judge Establishes Lowe's as Lead Bidder With $205 Million Offer for Chain.


Orchard Supply Hardware OSHWQ +3.63% Stores won bankruptcy-court approval to put itself on the auction block next month with a $205 million leading bid from Lowe's Cos. LOW +0.97%

The bankruptcy judge in the case on Monday authorized Orchard Supply to hold an Aug. 14 auction at which Lowe's will serve as stalking horse, or lead bidder, for at least 60 hardware and garden stores, court papers show.

Lowe's has said it plans to operate Orchard Supply as a stand-alone business with the same name and management team.

U.S. Bankruptcy Court Judge Christopher S. Sontchi said he would consider the winning bid at an Aug. 20 sale hearing, just two months after Orchard Supply sought Chapter 11 bankruptcy protection with the Lowe's offer in hand.

Under the auction rules, rival bidders must submit their offers by Aug. 9. Those offers must exceed Lowe's $205 million bid by $9 million. That covers $7 million in bidder protections payable to Lowe's if it loses, plus a $2 million overbid.

Founded in 1931 in San Jose, Calif., Orchard Supply completed its spinoff from Sears Holdings Corp. SHLD +2.52% at the beginning of 2012. The company had 91 stores in California and Oregon at the time of its June 17 bankruptcy filing, but it has since received court approval to close eight underperforming stores in California. Store-closing sales are now under way.

To motivate its leaders to secure the best possible offer for its stores, Orchard Supply will return to bankruptcy court next week for approval of an executive bonus plan.

Four of Orchard Supply's top executives, including President and Chief Executive Mark Baker and Chief Financial Officer Chris Newman, would be eligible to receive as much as $3.1 million if the ultimate sale price tops $300 million.

A sale of at least $200 million would bring in nearly $2.2 million in bonuses for the executives under the proposed plan. Lowe's has committed to cover 50% of the bonus payments if it emerges as the winning bidder at next month's auction.

Also on the agenda for next week's hearing is a $176.3 million bankruptcy loan from lenders led by Wells Fargo Bank WFC -0.82% . As is typical in Chapter 11, Orchard Supply received court approval to access some of the financing shortly after its bankruptcy filing but must return to court in order to draw the full amount.

—Rachel Feintzeig contributed to this article.

http://online.wsj.com/article/SB10001424127887324507404578595530610090000.html