March 6, 1998 12:35 PM PST

Learning Co. to buy Mindscape

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The Learning Company (TLC) today agreed to buy Mindscape for $150 million in cash and stock, another sign of consolidation in the educational software market.

Wall Street responded positively to news of the buyout.

BancAmerica Robertson Stephens raised its rating on shares of The Learning Company to "buy" from "long-term attractive," and the company's stock jumped about 11 percent in today's trading, closing at 19, up from yesterday's close of 17-5/16.

The Learning Company said it expects the purchase to boost fiscal 1998 earnings by at least 5 cents per share. For the most recent quarter, the company posted revenue of $120.2 million, compared with revenues of about $130 million for the quarter ended December 31. TLC's 1997 year-end revenue was $392.4 million.

Competition in the educational software, or "edutainment" market, has been intense. It has been characterized by consolidation, money-losing quarters, and layoffs for some companies.

Mindscape is among those who have suffered steep losses, however, those losses have narrowed somewhat.

"Mindscape's losses have been reduced significantly during 1997, even after taking account of [one-time charges]," according to Pearson's financial statements. "The improvement has been underpinned by cost reductions and the strong performance by Printmaster."

Pearson, the London publishing giant, bought Mindscape in 1994 with high hopes. But the video-game cartridge market fell upon hard times, and a software price war broke out.

"It was important to us to find a new owner for the business who we believe values the talent, drive, and commitment of the people at Mindscape and will build on what has been achieved over the past year," Pearson chief executive Marjorie Scardino said in a statement.

The market's dominant players include Learning Company and Cendant. Others players include Broderbund (BROD), Disney Interactive, and Microsoft (MSFT).

Today's acquisition marks the latest in a string of deals, including SoftKey's acquisition of The Learning Company in 1995, which resulted in SoftKey changing its name to The Learning Company. Other acquisitions included Edusoft, Learning Services, Skills Bank, Minnesota Educational Computing and Creative Wonders--a joint venture of ABC and Electronic Arts.

Analysts praised The Learning Company's ability to grow through acquisition.

"There are a lot of small companies out there," without much product overlap, so the company has been able to expand its product line and boost sales, said Michael Wallace, an analyst with UBS Securities.

Mindscape's products include Printmaster, a gallery of original artwork; the Princeton Review, software that helps students prepare for college entrance exams; and Chessmaster 5500, a computer chess program.

The Learning Company's biggest threat could come from competitor Cendant (formerly CUC), if that company gets aggressive about winning back market share. The Learning Company ranked No. 1 in the market at year's end, in terms of sales, and Cendant ranked second, according to Wallace, who noted that Cendant is expected to ramp up its retailing efforts this year.

"Disney is a strong player, but nowhere near No. 1," Wallace said. Microsoft has tried to nudge into this space, but the software giant remains a small player.

Mindscape, a Pearson company, is the publisher of Mavis Beacon Teaches Typing, the Complete National Geographic Collection, Print Master Platinum, Chessmaster 5500, The Princeton Review: Inside the SAT & ACT, and other reference and educational titles.

The Learning Company, owner of filtering software maker Cyber Patrol, also said today that its Canadian subsidiary, SoftKey Software Products, agreed to sell about $6.25 million in warrants to institutional investors in Canada, for proceeds of about $104 million.

Each warrant is exercisable for one SoftKey exchangeable non-voting share. Those shares, in turn, can be swapped for common stock in The Learning Company.

 

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