Directors of Pan American World Airways reached a tentative agreement to sell its Inter-Continental Hotels Corp. subsidiary to Grand Metropolitan Ltd., a London-based company that has hotels and is also in the food and liquor business.

Pan Am spokesman James A. Arey said shortly after midnight today that the board directed the legal staff to devise a formal agreement. As of midnight, he said, there was no formal agreement.

Inter-Continental Hotels is one of the few profit-makers left at the foundering company whose major asset is the large international airline, Pan American. Although sources close to Pan Am say the directors did not relish selling the hotel chain, Pan Am was forced into it in order to raise cash.

Banking sources said the Grand Metropolitan offer is slightly less than $5 million.

Inter-Continental last year made $42 million -- while the airline lost $248 million -- and earned $23.8 million for the first six months of this year while the airline lost $240 million.

But sources said the sale virtually has been dictated by Pan Am's bankers, who have slashed the company's credit lines from $463 million to $200 million and secured the reduced line with a lien on the hotel chain. If the hotels are sold, the banks get paid off before Pan Am gets any of the proceeds.

The company wants to sell some of its planes, but the market is glutted. It is trying to convince its unions to take a pay cut of 10 percent and also plans to cut its service 10 percent in October. But even if its cost-cutting is successful, the company needs cash to get through its slow winter season. But it can't convince bankers to give it much money. "There is zero confidence in Pan Am management," said a major banker.

"Pan Am needs breathing room," said a source close to the airline industry. "They can't sell the airline, and they need cash. The only way to survive is to sell off the profitable part of the operation and hope they can turn the airline around."

Many bankers and analysts think that Pan Am may not make it and will become the first major airline to go bankrupt. Pan Am has been plagued by problems from its merger last year with National Airlines, has faced rising fuel prices, falling passenger loads and heavy fare wars on many of its major routes.

Sources said some directors were reluctant to sell the chain with only one bid on the table.

Pan Am apparently has rebuffed potential bids from other hotel operators, including Westin Hotels, a subsidiary of UAL Inc., which owns United Airlines, and Hilton Hotels Corp., which runs an international hotel chain similar to Inter-Continental's. All but a handful of the 83 hotels Inter-Continental runs (it only owns six of those) are outside of the United States, so antitrust problems seem nearly nonexistent, said one analyst.

"I can't understand why management doesn't put the hotels out for bidding. They've got to raise as much cash as they can. Considering only one bid doesn't seem the best way to do that," said one industry source. Pan Am Agrees to Sell Hotels For $500 Million By James L. Rowe Jr. Washington Post Staff Writer

NEW YORK, Aug. 21 (Friday) -- Pan American World Airways Inc., financially strapped and pushed by its bankers to raise needed cash, announced early this morning that it will sell its profitable Inter-Continental Hotels subsidiary for $500 million.

The purchaser was Grand Metropolitan Ltd., a London-based firm that runs hotels in Europe, the Middle East and is also involved in the liquor and food businesses.

Pan American's directors met for nearly six hours in a special meeting yesterday and approved the sale. Sources said the directors were reluctant to sell Inter-Continental because it is one of the few profit sources left at the foundering airline.

The hotel chain last year made $42 million for Pan Am while the flagship international airline lost $248 million. In the first six months of this year the hotel subsidiary earned $23.8 million while the airline lost $240 million.

But sources said the sale virtually was dictated by Pan Am's bankers, who have slashed the company's credit lines from $463 million to $200 million and secured that reduced line with a lien on the hotel chain.

The company wanted to sell some of its planes but cannot because there is an oversupply in the world market. Pan Am also is trying to convince its unions to take a pay cut of 10 percent and plans to cut back its service in October. But even if its cost-cutting succeeds, the company needs cash to get it through it's slow winter season, but it can't convince its bankers to give it enough money. "There is zero confidence in Pan Am's management," said a major banker.

Even with the $500 million injection Pan American will receive from the sale of its worldwide hotel chain, many bankers and analyists think that the airline will go bankrupt. Pan American has been plagued by problems emanating from its merger last year with National Airlines. Pan Am also faces sharply rising fuel prices, falling passenger loads and intense fare wars on many of its major routes.

"Pan Am needs breathing room," said a source close to the industry. "They can't sell any airplanes and they need cash. The only way they can survive, with their bankers taking the hard line, is to sell off the profitable part of the operation and hope they can turn the airline around."

Several directors apparently were reluctant to sell the hotel chain because Pan Am management was only willing to consider the Grand Metropolitan bid. Airline management apparently rebuffed potential bids from other hotel operators, including Westin Hotels, a subsidiary of UAL, Inc., which owns United Airlines, and Hilton Hotels Corp., which runs an international hotel chain similar to Inter-Continental's.

Inter-Continental, founded in 1946, runs 97 hotels in 48 countries.

Pan Am said this morning that the deal is expected to be closed by Sept. 30. Two of Pan Am's major lenders are Morgan Guaranty Trust Co. and Citibank.