May 16 (Bloomberg) -- Billionaire investor Edward Lampert, who built his fortune investing in underperforming companies, has purchased an $837 million stake in Citigroup Inc.

ESL Investments Inc., the hedge fund Lampert founded in 1988, acquired 15.2 million shares of the biggest U.S. bank since the end of 2005, according to a filing yesterday with the U.S. Securities and Exchange Commission.

Lampert, 44, modeled his approach for finding undervalued stocks from the shareholder letters of Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. Before starting ESL, Lampert worked at Goldman Sachs Group Inc. under Robert Rubin, now the chairman of New York-based Citigroup's executive committee.

Like Buffett, Lampert invests in ``stable businesses with predictable income streams that have very strong brands,'' said Barry Colvin, vice chairman at Balyasny Asset Management LP, a Chicago-based hedge fund with about $1 billion under management. ``Citi certainly fits that profile.''

Shares of Citigroup have dropped about 1.4 percent this year, after rallying to a record $56.41 in December. That compares with a .3 percent increase in the 24-member Philadelphia KBW Bank Index. The stock rose $2.12, or 4 percent, to $54.91 at 4:17 p.m. in New York Stock Exchange composite trading.

Activist History

Citigroup spokeswoman Christina Pretto and Steve Lipin, who represents ESL, declined to comment.

Lampert has helped turn around some of his investments by collaborating with or shaking up management. When Greenwich, Connecticut-based ESL acquired a 10.1 percent stake in AutoZone Inc. in the late 1990s, Lampert visited the Memphis, Tennessee- based company's auto-parts stores, talked with managers and fought a takeover defense adopted by the board.

Lampert gained control of Kmart Corp. in a debt-equity swap in 2003 and merged the troubled retailer with Sears, Roebuck & Co. in 2005 to form the nation's largest department-store chain. Since then, shares of Sears Holdings Corp. have increased about 79 percent.

While he now divides his time between running ESL and serving as chairman of Hoffman Estates, Illinois-based Sears, Lampert's history led to speculation that he may seek to influence Citigroup.

``We don't always side with activist shareholders, but it seems that Eddie Lampert has taken a longer-term view in the past,'' said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California, a Citigroup shareholder.

Saudi Prince

``We think that he could orchestrate lasting change,'' instead of ``depleting the balance sheet to sell the company,'' Armbruster said.

Investors including Saudi Prince Alwaleed bin Talal have complained that the bank spent too much investing in new branches and marketing campaigns. While Citigroup's revenue climbed 7 percent last year, operating costs swelled by 15 percent.

Charles Prince, Citigroup's 57-year-old chief executive officer, is cutting costs to boost profit growth. Robert Druskin, whom Prince promoted to operating chief in December, expects to reduce annual expenses by $4.6 billion over the next three years, after they reached $52 billion in 2006.

William Smith, president of Smith Asset Management in New York which owns about 50,000 Citigroup shares, reiterated his call made last year for the bank to be broken up to create more value for investors.

Break it Up

``After three years we saw what was going on. You had rising expenses, revenue stagnant, and no other way to enhance shareholder value but break it up,'' Smith said in an interview today. ``If Chuck Prince tried to change something instead of staying the course, he would have more time, but he didn't.''

Unlike many hedge funds, ESL takes large stakes in a few companies and holds them for years. ESL's filing yesterday shows the firm owns shares in AutoZone, AutoNation Inc., Clear Channel Communications Inc., Motorola Inc. and Sears, in addition to Citigroup.

ESL owned 1.74 million Citigroup shares as of March 31, 2006, then raised its stake to 9 million shares by June 30 and 10.9 million shares at Sept. 30, according to SEC filings yesterday. ESL added 4.4 million shares during the first quarter of this year. The firm owns less than 1 percent of Citigroup's stock.

``Anyone standing alongside Eddie in any deal will do very well,'' said Robert Monks, a shareholder activist who worked with Lampert in a proxy fight against defense contractor Honeywell Inc. in 1989.

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 16, 2007 17:22 EDT