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Lowe’s Companies Inc. (LOW - Analyst Report) recently announced that it has entered into an agreement with the local hardware store operator, Orchard Supply Hardware Stores Corporation to buy the majority assets of the latter for $205 million in cash.

This announcement is a crucial move on Lowe’s part as increasing square-footage in the key California market brings significant opportunities for the company to improve its top line and profitability.

Lowe’s currently operates through 110 stores in California. However, its presence is significantly lower than its competitor, The Home Depot, Inc. (HD - Analyst Report) and arguably one of the reasons why it has been lagging the latter in terms of performance. Orchard has 91 neighborhood hardware and garden stores of which Lowe’s would acquire at least 60 stores.

Orchard’s smaller-format stores located at prime locations of the region are likely to bolster Lowe’s positioning in California’s housing recovery and facilitate the company to capitalize on the under-penetrated markets. 

Going forward, this Zacks Rank #3 (Hold) company stated that upon completion of the deal, it will retain the Orchard brand and the current management team. Alongside, Orchard will operate as an individual unit.

Orchard, which was spun off by Sears Holdings Corporation (SHLD - Analyst Report) in 2012, has filed a voluntary Chapter 11 bankruptcy petition. Hence Lowe’s offer will essentially serve as the “stalking-horse bid”.

In the absence of competing bids, Lowe’s will acquire Orchard's assets, subject to the consent of the Bankruptcy Court. On the flipside, Lowe’s would receive a break-up fee of 3% of the purchase price if it fails to acquire the company. Moreover, an alternative bidder has to outbid Lowe’s by a minimum of $12.0 million.

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