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By Susan Kelly
CHICAGO, Oct 31 (Reuters) - AutoZone Inc. , the largest U.S. auto parts retailer, on Friday said its largest shareholder, ESL Investments Inc., will sell about 5.6 million of the company's stock, or about a fifth of its total stake.
The news pressured AutoZone's shares, which fell more than 7 percent, one day after hitting an all-time high.
Greenwich, Connecticut-based ESL, a hedge fund whose chairman and chief executive is Edward Lampert, said it was selling the shares to diversify its holdings and that it would continue to be a large AutoZone shareholder.
Lampert owned 25.5 million of AutoZone's shares, or 28.8 percent of the shares outstanding, as of Oct. 14, according to AutoZone's proxy statement which was filed on Friday.
ESL will receive about $550 million for the shares, Memphis, Tennessee-based AutoZone said. Citigroup Global Markets Inc. will underwrite the public offering.
ESL also agreed to sell to a Citigroup affiliate, for about $6 million, an option to purchase 4.4 million AutoZone shares at an exercise price of $100 per share, effective Dec. 19.
In connection with the option, the Citigroup affiliate expects to initially offer about 1.8 million AutoZone shares.
US Bancorp Piper Jaffray analyst Reed Anderson, who rates AutoZone's stock a "strong buy," noted the potential for a stock sale by ESL had been widely known because a shelf registration has been in place since early 2002.
"That being said, the intended sale does create a large immediate overhang, and we expect it to severely limit the stock's appreciation potential over the next several months," Anderson wrote in a research note.
Lampert, who became chairman of Kmart Holding Corp. after the retailer emerged from bankruptcy in May, is a director of AutoZone and No. 1 U.S. auto dealership chain AutoNation Inc. , and also owns a large stake in Sears, Roebuck and Co. .
Lampert survived a three-day kidnapping ordeal in January and was released unharmed. Three of four suspects in the case pleaded guilty.
In a bizarre twist, the millionaire investor was told by his kidnappers that AutoZone had paid $3 million to kill him, a story that turned out to be false, The Wall Street Journal reported shortly after the incident.
AutoZone's stock dropped $7.43, or 7.2 percent, to $96.10 in Friday afternoon trading on the New York Stock Exchange. Shares of competing car parts chains including Advance Auto Parts Inc. and O'Reilly Automotive Inc. also fell.
Shares in the sector have soared to historic peaks this year as parts retailers have consolidated, muscling out smaller independent shops, and benefited from a growing number of aging vehicles on the road.