EXCLUSIVE-Lone Star's BI-LO up for sale -source

* Kroger, Publix among potential bidders -source

* Bidders include private equity, other strategic buyers

* Lone Star bought BI-LO in '05 for $660 mln

* BI-LO emerged from bankruptcy in May

(Adds background about cos, portfolio firm sales, byline)

By Paritosh Bansal and Megan Davies

NEW YORK (Reuters) - BI-LO LLC, a U.S. supermarket chain owned by Lone Star Funds, is up for sale and has drawn interest from strategic and private equity buyers, a source familiar with the matter said Monday.

U.S. supermarket chains Kroger Co and Publix Super Markets are among potential bidders and are considering buying at least a significant number of BI-LO stores, the source said.

Kroger and Publix were not immediately available for comment. Lone Star declined to comment. The source is anonymous because the talks are not public.

The news of BI-LO's auction adds to a flood of private equity portfolio companies going on the block in recent months, as firms have incentives both to buy and to sell right now.

Pressure is on to invest billions of dollars raised in 2006-2008 as the end of those funds' investment periods approach, while funds are also keen to sell or take public existing investments to reward under-pressure investors.

Greenville, S.C.-based BI-LO emerged from bankruptcy protection in May after spending a little over a year there.

It had filed for bankruptcy in March 2009, as a weak economy and intense competition weighed on the supermarket industry, joining other grocers such as Bashas' Inc, Arizona's largest family-owned grocery chain and regional supermarket chain Penn Traffic Co.

BI-LO operates 207 supermarkets in South Carolina, North Carolina, Georgia and Tennessee. About 75 percent of the company's stores are in markets where it ranks as the number one or two conventional grocer, Reuters reported in April, citing company data.

Dallas-based Lone Star, a large private equity firm with $24 billion of capital, bought BI-LO in 2005 for $660 million from Dutch supermarket group Royal Ahold. Ahold had owned the chain, which was founded in 1964, since 1977.

In April, BI-LO said the reorganization plan approved by the court included a $150 million equity investment by Lone Star and $200 million in committed term loan financing from Credit Suisse. In addition, GE Capital provided a $150 million revolving credit facility. (Reporting by Paritosh Bansal and Megan Davies; Editing by Phil Berlowitz, Bernard Orr) (For more M&A news and our DealZone blog, go to http://www.reuters.com/deals)