The company, which is selling its two breweries and half of its pubs to focus on its Swallow Hotels chain, said that pub revenues in the first nine weeks of the new financial year were 8.1 per cent below 1997.
Vaux said it would change its name to Swallow Group once the disposals were completed and announced the departure of chairman Sir Paul Nicholson after 33 years.
Martin Grant, the chief executive, said that the pub division had suffered from its heavy exposure to the recession-hit North-east. "There isn't an awful lot of consumer confidence out there," he said.
Mr Grant, who was poached from Allied Domecq in May to shake-up the underperforming group, said the pub market was set to remain "challenging" throughout 1999.
However, he said that the company's four-star Swallow Hotels continued to perform strongly and that bookings into 1999 were "buoyant".
His comments came as Vaux reported an 8 per cent rise in pre-tax profits to pounds 40.1m before a pounds 25.7m exceptional charge on the brewing and pub disposals. Turnover fell 3 per cent to pounds 283.2m. The shares rose 8p to 245.5p.
The results highlighted the stark contrast between Vaux's hotels and pubs businesses. Swallow was the driver behind the profit growth, with operating profit climbing 12.9 per cent. Pubs fared much worse, with profits in tenanted houses sliding 1 per cent and managed houses posting a modest increase.
City analysts said the results and the current state of the market vindicated Mr Grant's decision to exit brewing and sharply reduce Vaux's pub estate. The disposal of the tenanted houses would help to reduce costs and remove a drag on the group's profits.
Industry experts said that in the rapidly consolidating pub market, Vaux had to divest its low-return, low margins houses.
Similarly, the sale of the poorly performing Sunderland and Rochdale breweries, which produce Vaux and Lambton's ales, would improve margins in the division as the remaining 300 houses would be able to buy beer in the open market.
They said that the disposals, which are expected to fetch pounds 70m-pounds 100m, would enable Vaux to add to its 36 Swallow Hotels and to return cash to shareholders.
Nigel Popham at Teather and Greenwood said that the shares are worth buying, as they trade on just 10 times 1999 expected earnings of pounds 44m.
"First of all, the long-term outlook for hotels is bullish. Secondly, Vaux is driven by strong management and thirdly, they are getting out of breweries and pubs," he said.
Ben Maitland, an analyst with broker Sutherlands, said that the group's shake-up would make it more attractive to a suitor, such as the brewing giant Whitbread or the hotel operator Stakis.
"The upside to Vaux' shares is that once it sells breweries and pubs it will be a very attractive package for one of its rivals," he said.
Mr Grant said that he expected to announce a buyer for the breweries and pubs by January or February.
A number of groups, including Nomura, Enterprise Inns and a management buyout team led by Frank Nicholson, the outgoing chairman's brother, are thought to be in the running.Reuse content