May 15 (Bloomberg) -- Edward Lampert, the money manager who turned the bankrupt Kmart Corp. into the nation's largest department store chain, disclosed that he has built an $800 million stake in Citigroup Inc.

ESL Investments Inc., the hedge fund Lampert founded in 1988 after leaving Goldman Sachs Group Inc. reported today that it held 15.2 million shares in Citigroup as of March 31. The Greenwich, Connecticut, fund has been increasing its stake in Citigroup, the largest U.S. bank, since the first quarter of 2006, according to filings with the U.S. Securities and Exchange Commission.

Lampert, in founding ESL, modeled his approach to finding undervalued companies from the shareholder letters of Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. The Citigroup investment follows an approach that has led ESL to take stakes in Kmart, AutoZone Inc. and AutoNation Inc.

Like Buffett, Lampert invests in ``stable businesses with predictable income streams that have very strong brands,'' said Barry Colvin, the former president of Tremont Capital Management Inc., which invests in hedge funds. ``Citi certainly fits that profile,'' said Colvin, who is now vice chairman of Balyasny Asset Management LP, a Chicago-based hedge fund with about $1 billion in assets under management.

Kmart Reorganization

ESL acquired Kmart debt during the discount chain's trip to bankruptcy court and became its largest shareholder after the company completed its reorganization in May 2003. Lampert then engineered Kmart's $12.3 billion acquisition of Sears, Roebuck & Co. in March 2005 to form Sears Holding Corp., the largest U.S. department store company. He is chairman of Sears and chairman and chief executive officer of ESL.

Since Charles Prince took over as Citigroup's CEO on October 1, 2003, company shares have increased 16 percent, well behind the 33 percent rise in the KBW Bank Index of 24 major U.S.-based banks. Prince enlisted Chief Operating Officer Robert Druskin to cut $4.6 billion over the next three years from its annual expenses, which totaled about $52 billion in 2006.

ESL, which held 1.74 million Citigroup shares as of March 31, 2006, raised its stake to 9 million shares as of June 30 and 10.9 million shares as of September 30, today's SEC filings show. The fund group bought no Citigroup stock during the fourth quarter of 2006, and then added 4.4 million shares during this year's first quarter.

Prior to forming ESL, Lampert worked in Goldman's risk arbitrage department under Robert Rubin, who is now the chairman of Citigroup's executive committee.

``Given Lampert's background and knowledge base, Citi seems a more logical purchase than an AutoNation or Sears and Kmart,'' Colvin said.

Steven Lipin, an outside spokesman for ESL, declined to comment.

Citigroup shares rose 96 cents, or 1.8 percent, to $53.75 as of 6:07 p.m. in New York.

To contact the reporters on this story: Miles Weiss in Washington at mweiss@bloomberg.net; Joseph N. DiStefano in New York at jdistef@bloomberg.net

Last Updated: May 15, 2007 19:59 EDT