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* Investment funds selling shares; hold total worth bout $1.9 bln
* Share sale follows failed effort to sell the company
* KAR shares drop 4.5 percent
NEW YORK, Nov 30 (Reuters) - KAR Auction Services Inc said on Friday its private equity owners would sell up to $200 million of their shares, a move that comes just weeks after people familiar with the matter said the vehicle auction company had ended efforts to sell itself.
KAR said the shares would be sold by investment funds Kelso Investment Associates VII LP, GS Capital Partners VI LP., ValueAct Capital Master Fund LP and Parthenon Investors II LP, which together own 78.2 percent of KAR's shares.
The holdings represent a market value of about $1.9 billion as of the end of trading on Friday.
KAR said the sale of shares would be through an underwritten offering of up to $200 million. All proceeds will go to the investment firms.
Shares in KAR, the second largest provider of whole car auctions in the United States, ended trading down 4.5 percent on the news at $17.77.
KAR had ended efforts to sell itself after talks with private equity firm Clayton Dubilier & Rice LLC broke down over price and other deal terms, Reuters reported on Nov. 13.
KAR also said on Friday it would pay its first-ever dividend after clinching amendments to a credit agreement to increase the amount of restricted payments, such as dividends and share buybacks, that are permitted. The initial quarterly dividend of 19 cents per share will be paid on Dec. 28, KAR said.
Standard & Poor's Ratings Services said on Tuesday in a note that KAR's financial policy appears to have become more aggressive, as the increased size of the restricted payment basket signals it may make restricted payments out of free operating cash flow to shareholders rather than using cash flow to reduce debt, as was its policy as of early 2011.
Private equity has been seen as the most likely buyer for the Carmel, Indiana-based company, with any buyer in the sector likely to be hampered by tough competition in the used-car wholesale and salvage auction markets.
KAR's ADESA and rival Manheim, a unit of Atlanta-based Cox Enterprises, together have an estimated 70 percent share of the U.S. used-car wholesale auction market, with ADESA accounting for 25 percent, according to KAR's estimates.
Credit Suisse Securities (USA) LLC, Goldman Sachs & Co and J.P. Morgan Securities LLC are acting as joint book-running managers for the offering. KAR said it intended to grant the underwriters an option to purchase an additional 15 percent of the number of shares in the offering.