UPDATE 1-Magnit shares drop as source says eyes share issue

* Hires VTB Capital, Morgan Stanley for share offer-sources

* Up to 10 pct of company could be sold in Moscow, London

* Shares fall 11 percent

(Changes source, adds share drop)

MOSCOW, July 6 (Reuters) - Russian grocery store chain Magnit (MGNT.MM) has hired VTB Capital (VTBR.MM) and Morgan Stanley (MS.N) for a potential secondary share offering, industry sources told Reuters on Monday.

The sources broadly confirmed a report in Kommersant business daily that the placement of up to 10 percent of stock in the retailer in Moscow and London could raise over $300 million this autumn.

Magnit, whose stock in London (MGNTq.L) fell 11 percent on Monday, declined to comment on the report.

"We have such an idea (of a secondary share placement) and it is currently being digested," said a source close to Magnit's shareholders. A banking source told Reuters that Morgan Stanley and VTB had a mandate to organise financing for Magnit.

A potential SPO by Magnit, Russia's biggest discounter, surprised analysts.

"Frankly speaking, the company doesn't need fresh capital. With expected EBTDA of $500 million, with low debt levels and a substantial cash flow generation, Magnit doesn't need money," said Alexei Krivoshapko from Prosperity Capital.

"It is a bit strange to sacrifice control for a sum that the firm can easily generate itself," he added.

According to calculations by analysts from UBS, if the main owners of Magnit did not exercise their pre-emptive right the new issue would dilute the share of the main shareholder, Sergei Galitsky, to 45 percent from 51 percent. The free float would rise to 45 percent.

The Krasnodar, Russia-based retailer operated 2,763 stores as of the end of May, and its revenues totalled $425 million that month. [ID:nL9660278]

Magnit's debt is estimated at $400 million, of which some $250 million are short-term rouble debt.

It plans to spend 15 billion roubles ($480 million) to open 10 new hypermarkets and 450 new stores this year.

Magnit's share price has rallied in Moscow and London since the beginning of the year as investors were betting the discounter was better protected than its peers against Russia's deep economic downturn.

Magnit held an IPO in 2006 and floated more stock last year, bringing its free float to 39 percent. (Reporting by Maria Plis; Writing by Dmitry Zhdannikov, editing by Will Waterman)