Outlook: Pearson

PEARSON HAS plainly had to downgrade quite considerably its expectations of what Madam Tussaud's might be worth in order to get this business away. Even with the benefit of an auction among buyout funds, Pearson struggled to realise pounds 352m, which was far less than the pounds 450m originally expected by outsiders and less even than the more conservative estimate of pounds 400m that had been pencilled in internally.

So why didn't Pearson wait for more favourable market conditions? The liquidity squeeze has led some buyout funds to retreat from the market altogether. Others have markedly dropped the prices they are prepared to pay. As a consequence, Marjorie Scardino, Pearson's chief executive, found the sellers market that still existed as recently as early summer, had disappeared. But still she sold.

The obvious explanation for this is that Pearson needs the money and took the gamble that while prices may already be bad, they could be even worse in a year's time.

Pearson is gearing itself up to the hilt with its $4.6bn acquisition of Simon & Schuster from Viacom. A parallel part of this deal - the $1bn sale of Simon & Schuster's non academic interests to the US buyout group Hicks & Muse - could be in difficulty as a result of the very same factors listed above. Both sides insist that the transaction will still proceed as planned, but if it doesn't, then Pearson is in for rather more than it bargained for. With this deal at risk, Pearson couldn't afford for a second, the sale of Madam Tussaud's, to go wrong too.

It is always possible that Pearson will find itself off the hook entirely, since there is still a chance the US trade commission will block the Simon & Schuster acquisition on competition grounds; Pearson will have more than 20 per cent of the US education market should the deal go through. On the other hand this doesn't appear likely, and if the transaction is completed without the simultaneous disposal, it will stretch the balance sheet, Pearson will lose its present strong credit rating, and the cost of its capital will rise. In these circumstances, the pressure was on to get at least the Tussaud's deal away.

Pearson's loss is Charterhouse Development Capital's gain. Viewed on a medium to long term basis, Charterhouse seems to have got itself a bargain. Tussaud's is a cash generative business, with a strong and easily exportable brand that will underpin its already excellent growth prospects.

Charterhouse has been largely out of the buyout market for more than two years, deterred by the high prices, so it obviously sees something special in Tussaud's. Even so, to do the deal in these markets, and thus spend some of the pounds 800m buyout fund, Charterhouse has been forced back on a highly conservative financing structure - fifty per cent equity, and fifty per cent debt, against eighty per cent debt in a more usual buyout. Pearson might reasonably counter, therefore, that Charterhouse's need to buy was as strong as its own need to sell. So maybe the price wasn't such a bad one after all.