Six Continents to slash dividend after pubs and bars demerger

Six Continents officially abandoned the hunt for a major hotels acquisition yesterday as it confirmed plans to demerge its pubs and bars division and return £700m to shareholders.

But news that the group, which spans Inter-Continental hotels and All Bar One high street pubs, would cut its dividend by 38 per cent prompted its shares to sink by 10 per cent.

Tim Clarke, the chief executive, who will head up the yet-to-be-named retail group, said splitting the two businesses would give each division "more strategic flexibility". He said the logic of running the combined group fell apart after it had failed to use the cash pile raised by the £2.3bn sale of Bass Brewers to Interbrew in 2000 to snap up some hotel assets.

"Because of lower interest rates, we haven't seen hotel asset prices fall anything like hotel profits have," he added. As part of the demerger, which will silence vocal critical investors such as Hermes, shareholders will receive shares in both companies as well as a cash payment of 81p a share. In total, the group will return £970m to investors by the time the demerger is completed in April.

Richard North, the finance director who will head up the hotels arm, dismissed the share price fall, which saw the group top the losers in the FTSE 100 index, as a "technical correction". He added: "The shareholder base is changing as we lose the income funds [who bought our stock because it had the second-highest yield in the FTSE 100] and see the growth funds come in."

The new hotels group, which includes the Holiday Inn and Crowne Plaza brands, will keep the name Six Continents – chosen to reflect the global spread of its assets.

Analysts welcomed the move to split the businesses but questioned what would happen if a major hotels deal suddenly became available. Many added that doubts over Mr North's untested ability to head a FTSE 100 company would continue to dog the stock, which closed down 62p at 531p. Richard Carter, at Investec Securities, said: "The major surprise has been the cut in dividend which has really spooked the market and the downgrade in the credit rating [from Moody's and Standard & Poor's]."

In an accompanying trading update, the group said trading was in line with expectations. Hotels had showed an improved performance, while the retail side had profits growth but a fall in annual like-for-like sales at its core outlets of 1.5 per cent.