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Orchard Supply drops after warning equity holders

NEW YORK (AP) -- Shares of Orchard Supply Hardware Stores Corp. plummeted Wednesday as the hardware and garden store company said that equity holders will probably lose their entire investment as a result of its Chapter 11 bankruptcy filing.

THE SPARK: Orchard Supply said it noticed heavy trading volume of its shares since it filed for bankruptcy protection on Monday. The company said stockholders of a business in Chapter 11 typically receive value only if all of its creditors' claims are fully satisfied, and it believes that is "highly unlikely."

Due to these circumstances, the company believes that equity holders will probably lose their full investment in the business.

THE BACKGROUND: Orchard Supply, based in San Jose, Calif., was spun off from Sears Holdings Corp. in January 2012.

On Monday, home improvement retailer Lowe's Cos. said that it plans to expand its California operations by acquiring Orchard Supply for about $205 million in cash. Since Orchard Supply filed for bankruptcy protection, Lowe's offer will become the "stalking horse" bid for an auction of Orchard's assets.

The "stalking horse" bid sets the floor for an auction process that lets competitors make better offers.

Lowe's said it will acquire at least 60 of Orchard Supply's stores, and alternative bids must top Lowe's offer by at least $12 million. Orchard Supply had 89 stores in California and two in Oregon as of Sunday.

Orchard Supply stores are smaller than Lowe's locations, and they are mostly in densely populated California markets.

In a separate release, Orchard Supply said the U.S. Bankruptcy Court for the District of Delaware approved all of the first day motions related to its bankruptcy filing. That will enable the company to access $177 million in financing. It will also enable the company to continue operations as usual, pay employees and accept bids from companies to manage store closing sales for at least eight stores.

SHARE ACTION: Down $1.04, or 60 percent, to 69 cents in afternoon trading on extremely heavy volume. The stock had fell as low as 61 cents earlier in the day.