The world's biggest international hotels group, Six Continents, is going to spin off its pubs and restaurant business.

This will enhance their ability to generate value for shareholders

Tim Clarke, Six Continents

The group, which used to be called Bass, will split into two separately listed companies and pay shareholders a �700m ($1.1bn) windfall.

But it also announced a cut in future dividends.

The company owns 2,000 UK pubs and restaurants including the All Bar One and O'Neill bar chains, as well as Harvester and Browns restaurants.

Its hotel brands include Intercontinental and Crowne Plaza and the mid-market Holiday Inn Express hotels.

The hotel side will continue to be known as Six Continents, and the company is looking for a new name for the pubs and drinks business.

Shares slide

The group's chief executive Tim Clarke said the two stand-alone businesses would benefit from the demerger.

We are very pleased at the demerger and return of cash to shareholders

David Pitt-Watson, fund manager

"This will enhance their ability to generate value for shareholders," he added.

But investors reacted nervously to the proposal.

Six Continents was the biggest blue-chip loser on the London stock market, with its shares down more than 10% at 530.5 pence in late morning trade.

'Good returns'

But one of the group's critics, the fund manager Hermes, welcomed the group's plan.

"We are very pleased at the demerger and return of cash to shareholders.

"This will form two strong focused companies which will deliver good returns to shareholders," said David Pitt-Watson, managing director of Hermes' UK Focus Fund.

It holds nearly 3% of Six Continents' shares and has argued for a return of cash to shareholders.

'No merger talks '

Mr Clarke will run the demerged retail pub operations.

"With proven brands and a strong pipeline, I am very confident about our prospects in retail," he said.

But he played down rumours of a possible merger with Scottish & Newcastle's pub business, saying the board was "not currently talking with anyone".

The restructuring is the group's second in recent years.

In August 2000 the firm, as Bass, sold off its brewing business to enable it to focus more closely on its global hotels business.

Slowdown hits hotels

Mr Clarke said of the demerger: "This is the final significant move that has seen the group transform itself over the past five years from a conglomerate to a highly focused leisure business."

The hotel industry has been hit by the global economic downturn and by a fall in the number of US tourists after the 11 September terrorist attacks.

The chief executive of the demerged hotels side will be the current finance director Richard North.

He said that although trading had been weak in the hotels business there were signs of an improving trend.

But he was cautious about the extent and timing of any recovery in the market.

Mr North also ruled out selling the soft drinks business Britvic which is being kept within the hotels group.

Credit rating agency Moody's said it was considering downgrading Six Continents' credit rating after the demerger plan was published.