Sears to Buy Orchard Supply for $415 Million
In a bid to grab a bigger chunk of California’s lucrative home repair market, Sears, Roebuck & Co. said Thursday that it will buy the San Jose-based Orchard Supply Hardware chain in a $415-million deal.
Sears plans to accelerate Orchard’s expansion into Southern California, as well as stock the mid-size stores with Sears’ popular hardware brands. The deal would boost Sears’ existing hardware store operations, none of which are in California.
Sears, which is ranked 20th in sales in the home improvement market, would vault to No. 9 when combined with Orchard, which is ranked 19th.
“We believe this transaction is attractive for our stockholders and creates an exciting opportunity for Orchard and its employees,” said Maynard Jenkins, Orchard’s chief executive. “Having access to Sears’ extensive resources should enable us to expand the Orchard concept and realize our growth and expansion plans.”
Orchard, which operates only in California, has 61 stores, including 11 in the Southland. Chicago-based Sears currently operates 115 Sears Hardware stores in the Midwest and on the East Coast.
Sears will make a tender offer of $35 a share for all Orchard shares by Wednesday, the companies said. Affiliates of Freeman, Spogli & Co., Orchard’s largest shareholder with 18.3%, have agreed to sell their shares, according to Sears.
Orchard, which would retain its name, plans to add 60 to 90 stores in the state, mostly in Southern California. The company, which has been opening five to 10 stores per year, could double its expansion pace under Sears management, industry analysts said.
The companies, which plan to sell the Craftsman and other popular Sears brands at the Orchard stores, may also be able to trim prices by pooling their buying power, said Kimberly Walin, an industry analyst at Furman Selz in New York.
“This would be a great fit for Sears and a positive for Orchard,” Walin said. “I don’t expect to see big changes at Orchard, because they’ve done well.”
Orchard on Thursday reported net income of $5.9 million for the second quarter ended July 28, compared with $5.6 million for the same quarter a year ago. Sales for the period were $161.9 million, compared with $145.5 million in the year-ago quarter. Orchard ranked second in sales growth among U.S. hardware chains, with $532.4 million in 1995, an increase of about 20%. Industrywide, sales rose just 3.5% that year as most smaller chains and single-store operations struggled.
Sears Hardware stores posted the industry’s biggest increase--estimated 1995 sales of about $500 million were 58% higher than the previous year, said Don Longo, editor of National Home Center News, a New York-based trade publication.
Combined, the chains could more than double their sales by 2000 through planned expansions, according to Richard Nelson, an analyst at Nesbitt Burns Securities in Chicago.
Orchard originated in 1931 as a co-op for farmers in the Santa Clara Valley and evolved into a hardware operation in the 1950s.
It was acquired by Wickes Cos. in 1986. Three years later, Freeman Spogli, a Los Angeles investment firm, helped finance a leveraged buyout of Orchard, taking the company private.
The company then went public in 1993, offering shares on the New York Stock Exchange. Freeman Spogli retained a large stake.
Orchard moved forcefully into Southern California in 1994, opening six stores in the region.
Sears shares closed down 25 cents at $44.625 in trading on the NYSE on Thursday after news of the deal. Orchard’s stock closed up $5 at $34.75.
