GSK buyback hopes rise after $1.7 billion Quest sale

LONDON Wed Feb 2, 2011 4:37am EST

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LONDON (Reuters) - Expectations that GlaxoSmithKline will restart a share buyback program in 2011 have risen with the sale of its stake in Quest Diagnostics for some $1.7 billion, or $1.1 billion after tax.

News of a fresh repurchase scheme could come on Thursday, when the British drugmaker announces its full-year results.

Chief Executive Andrew Witty told Reuters in December that the time to resume buybacks was getting closer -- but a big legal charge last month led many investors to believe GSK would have to postpone such a move.

The Quest divestment, announced on Wednesday, may give GSK the confidence to commit to repurchases this year after all, some analysts believe.

"The proceeds from the Quest sales should now allow the company to restart its repurchase program," said Jeff Holford, an analyst at Jefferies, who believes a buyback is imminent.

In a statement on Wednesday, GSK did not comment specifically on its buyback plans but said the Quest sale was designed to boost returns to shareholders.

"We have decided that now is a good time to take advantage of favorable market conditions, thereby releasing funds from one of our non-core assets," said finance chief Julian Heslop.

"This divestment demonstrates our focus on generating attractive returns for our shareholders and our ability to monetize significant gains when appropriate."

GSK originally acquired the Quest stake as part payment for the sale of its clinical laboratories business in 1999 and has since reduced its holding in stages.

A resumption of buybacks would be welcomed by investors, since there have been mounting calls for GSK to follow the lead set by other major drugmakers and start to give cash back.

Smaller British rival AstraZeneca last week doubled its 2011 buyback program to $4 billion and Pfizer on Tuesday said it expected to repurchase $5 billion of its shares this year.

Britain's biggest drugmaker suspended its share repurchase program in 2008 and has focused since on its top priorities of dividend increases and bolt-on deals, as well as keeping funds available for legal liabilities.

But GSK's Witty said in the December interview it was getting harder to find good acquisition opportunities at the right price. Meanwhile, the group may finally have put its big legal liabilities behind it, with the decision to take a 2.2 billion pounds ($3.5 billion) charge in the fourth quarter of 2010.

That legal charge, related to further claims around controversial diabetes drug Avandia and sales practices on other products, equates to an after-tax cost of 1.8 billion pounds that is expected to wipe-out profits for the last quarter.

(Editing by Alexander Smith)

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