(Reuters) - Orchard Supply Hardware Stores Corp (>> Orchard Supply Hardware Stores Corp), spun off by Sears Holdings Corp (>> Sears Holdings Corp) less than two years ago, has filed for Chapter 11 bankruptcy protection partly blaming hefty dividends paid out to its former parent.

Rival retailer Lowe's Companies (>> Lowe's Companies, Inc.) said it would buy at least 60 of Orchard's 91 neighborhood hardware and garden stores in California for about $205 million and also assume payables owed to nearly all of Orchard's suppliers.

Orchard shares were up 22 percent at $2.30 in early trading on Monday. The stock had fallen about 50 percent from early June up to Friday's close.

Orchard said in a court filing that it was carrying a high debt load and that it may not be able to make payments when the first tranche matures in December.

The company, which generated revenue of $657 million in fiscal 2012, listed total liabilities of $480.1 million and total assets of $441 million.

"The company's substantial debt due, in part, to significant recapitalization dividends paid to Sears, made it difficult, if not impossible for the company to right itself," Orchard said.

Management and the board determined that a sale of Orchard through a Chapter 11 process was the best possible outcome for the company and its stakeholders, Orchard said.

The company has secured commitments for $177 million in debtor-in-possession financing, which will help it meet financial obligations through the bankruptcy.

LOWE'S TO ACT AS "STALKING HORSE"

Orchard said Lowe's would act as a "stalking horse bidder," setting a minimum offer for the business, which could still be topped by others.

If there are no competing bids, the home improvement retailer will acquire Orchard's assets after obtaining bankruptcy court approval.

Lowe's plans to operate Orchard as a standalone business, retaining its brand and management.

"Strategically, the acquisition will provide us with immediate access to Orchard's high density, prime locations in attractive markets in California, where Lowe's is currently underpenetrated," said Robert Niblock, Lowe's chairman, president and chief executive.

Orchard said it expects the bankruptcy process to be completed in about 90 days.

"This transaction is both a smart and modest capital investment to attack a critical real estate shortcoming that Lowe's has relative to Home Depot (>> The Home Depot, Inc.)," Janney Montgomery Scott LLC analyst David Strasser wrote in a note.

Lowe's lacks conveniently located stores in key metro markets compared to Home Depot, and this deal could bridge that gap, particularly in markets like California, Strasser added.

The analyst has a "neutral" rating on Lowe's stock.

Lowe's shares were up less than 1 percent at $41.42.

The case is in re Orchard Supply Hardware Stores, Case No. 13-11565, U.S. Bankruptcy Court, District of Delaware.

(Reporting by Sakthi Prasad and Siddharth Cavale in Bangalore; Editing by Patrick Graham, Greg Mahlich and Roshni Menon)

By Sakthi Prasad