Pearson stuns City with pounds 46m Mindscape loss

Pearson stunned shareholders at yesterday's annual meeting when the owner of Madame Tussauds and the Financial Times warned that Mindscape, a games software house it bought two years ago for pounds 313m, would lose pounds 46m this year. Analysts knew that the Californian business was in trouble, following a pounds 7m loss in 1995, but the size of the shortfall exceeded even the most pessimistic forecasts.

Lord Blakenham, Pearson's chairman, signalled a continuation of the root- and-branch review of its failed diversification into multi-media, which has already seen it replace the company's chief executive this year. The problems at Mindscape are expected to increase pressure on management to sharpen the media and entertainment combine's focus as a way of fending off the predators that are rumoured to be circling the company.

Despite a far-reaching shift from a loose collection of industrial and service businesses a few years ago to a better-defined information, entertainment and education group, Pearson is still viewed as a slightly sleepy, family- run concern whose break-up value might be considerably in excess of the price tag given to the combined whole by the stockmarket.

Lord Blakenham said just under half Mindscape's heavy losses would be due to poor trading, with the rest made up of a write-down against the development costs of products that would not now come to market, redundancy costs and a change in accounting treatment of software costs and royalties.

Anthony de Larrinaga, an analyst at Panmure Gordon, the stockbroker, said: "This has been a running sore and this is confirmation of it. It looks as though it will take quite a lot to turn this one around." Shares in Pearson, which had been buoyed by the recent bid speculation, closed 18p lower at 677p, after touching 668p at one stage.

The expected losses at Mindscape were seized on by analysts as a reason to downgrade their profit forecasts for the year. Estimates were cut from about pounds 274m for the 12 months to December to as low as pounds 230m. For 1997 forecasts were trimmed to pounds 310m from pounds 335m.

Pearson bought Mindscape in April 1994, when the software industry was booming. Since then, the business has faced the collapse of the floppy disk market and intense price competition for software, particularly CD- ROMs.

Pearson admitted that, in order to boost sales last year, Mindscape had rushed to release a range of "mediocre'' multi-media products before they were fully developed. It had tried to handle too many titles in too large a product range.

To return to profitability, Mindscape will have to concentrate on its core markets this year to develop a range of better-selling games for 1997, analysts said. They were divided, however, on the chances of success.

An analyst said Mindscape's problems indicated that Pearson had overpaid for Mindscape, adding that its next large acquisition could be treated with some caution by the market.