Ares Buys 20% Stake in Orchard Hardware

Los Angeles investment firm Ares Management paid Sears Holdings Corp. $58.7 million for 19.9% of Orchard Supply Hardware, the companies said Friday, in what was expected to be a first step toward buying a majority stake.

The deal gives Ares’ investment fund the right within three years to buy an additional 30.2% share of the hardware and garden supply chain -- better known as OSH -- for $126.8 million. The San Jose-based chain has 84 stores, all in California.

Sears Holdings also said its Sears, Roebuck & Co. subsidiary expected to receive a dividend from OSH of about $450 million. In connection with the initial investment, OSH is expected to issue $405 million in debt.

Ares, whose portfolio of consumer-oriented businesses includes luggage maker Samsonite and the House of Blues nightclub chain, believes OSH can thrive as an alternative to bigger warehouse stores such as Home Depot and Lowe’s.

“What OSH stands for is a perfect-sized box for urban markets,” said David B. Kaplan, senior partner of Ares Management. “If your faucet breaks, you can go there and get what you need quickly -- and, by the way, you’re going to get a lot more help.”

Kaplan said Ares would work with OSH’s management team as the chain planned expansion in California and neighboring states. He said Ares intended to buy a controlling stake in OSH.

Hoffman Estates, Ill.-based Sears Holdings does not release sales or profit figures for OSH. Ares said the chain, which was founded in 1931 as a farmers’ cooperative, was profitable and that its revenue was growing.

Sears Holdings was created in March when Kmart Holdings Corp. acquired Sears, which bought OSH in 1996 for $415 million. The deal with Ares will allow the retailer to focus on its central business of running 3,900 department stores.

Sears stock rose $1.43 to $120.50 after the announcement.