Lowe’s Companies Inc. (NYSE: LOW) has been given approval by the U.S. Bankruptcy Court for the District of Delaware to purchase assets from bankrupt Orchard Supply Hardware for $205 million.

Lowe’s is buying 72 Orchard stores, and expects the deal to close by the end of August.

The deal will allow Lowe’s to expand its presence in California, where the company says it is currently underpenetrated.

The Orchard stores will operates as a separate, standalone business, and retain their San Jose headquarters.

Lowe’s was named the stalking-horse, or lead bidder, for the stores on June 17.

Mergers & Acquisitions placed Orchard on our June 11 Distressed Company Watch List after it indicated in filings with the U.S. Securities and Exchange Commission that it doubted its ability to continue as a going concern, or without the threat of liquidation. 

The company filed for Chapter 11 bankruptcy protection on June 17 in Wilmington, Del. 

From 2011 to 2012, Orchard’s accumulated deficit grew from about $179 million to about $298 million, SEC filings show. The company listed between $100 million and $500 million in assets and liabilities on its bankruptcy petition.

The company’s sales have declined from around $850 million in 2007 to just more than $650 million in 2010, it says in court papers. Orchard, in bankruptcy documents, says the decline was caused by the downturn in California’s economy, continued competition from Home Depot Inc. (NYSE: HD) and Lowe’s, and chain-wide operational deficiencies caused by a highly-leveraged capital structure.

Orchard says it has had a hard time addressing the overleveraging that happened in 2006, when it was owned by Sears Holdings Corp. (Nasdaq: SHLD). The company was spun off in 2011, and has reduced debt and made other improvements, but says it would not have been able to make loan payments when its debt matures in December 2013. The company has $208 million in debt due in the next year, SEC filings show.

The debtor, since its founding in 1931, has had many owners. W.R. Grace & Co. (NYSE: GRA) bought the company in 1979, and sold it to Wickes in 1986, which led to the company’s initial public offering in 1993. By then, Orchard owned more than 40 stores. In 1996, Sears bought and doubled the amount of stores it owned, Orchard says in bankruptcy filings. In 2011, Orchard had another IPO.

Sears sold all of Orchard’s Class A common stock and Series A Preferred stock. Around that time, Ares Capital Corp. (Nasdaq: ARCC) bought all of the company’s Class C common stock.

Moelis & Co., FTI Consulting and DLA Piper are advising Orchard.

Goldman Sachs acted as Lowe’s financial adviser, while Hunton & Williams LLP is acting as legal adviser.