Reasonable people can see both sides; however, that debate is beyond the purview of VOX. Instead, our question is whether investors can profit from owning Edleun shares. In this as well, reasonable people can see both sides — but, in my opinion, a deep amount of skepticism is warranted.

First, a little history. Edleun (for “Education Learning Universe”) is practically a startup, as it acquired its first 11 day-care centres in Alberta in May, 2010. It simultaneously went public by merging with a dormant company on the Venture Exchange. Today, it has 38 centres, with six more coming via acquisition or new construction.

The company’s management, including CEO Ty Durekas and vice-chairman Leslie Wulf, have backgrounds in for-profit child care in the United States. Financial backing for the company comes, in part, from Jeffrey Olin and Gary Goodman of Toronto firm Vision Capital, two men with time spent working for Paul Reichmann at Olympia & York Developments Ltd.

Edleun sees a huge opportunity in a deeply fragmented industry where, it says, the other five biggest operators have just 1 per cent of Canada’s child-care centres. Growth can come, Edleun says, from both acquisitions and building new centres.

Citing Statistics Canada, Edleun says fewer than 20 per cent of Canada’s children under the age of six with mothers in the work force have access to a licensed child care space. This creates a “child care gap” of 2.2 million spaces, Edleun argues; even taking smaller government estimates that 165,000 new spaces are needed suggests 1,000 to 1,500 new centres are required.

Filling this need sounds like a fabulous plan, which leads one to wonder: If all this is so obvious, why hasn’t anyone done it before?

A look at a hypothetical acquisition suggests the case for Edleun rests on the company creating quite a bit of value, quickly, with very little investment.

The scenario, created a year ago by Desjardins Securities analyst Jeffrey Roberts, looks at what Edleun can do after paying $1.16-million for an existing child-care centre with real estate worth $800,000 and a business valued at $360,000.

The hypothetical business, a 6,500-square-foot centre with capacity for 100 children, has revenue of $662,000 and EBITDA – earnings before interest, taxes, depreciation and amortization – of $200,000. It has just 80 per cent of its spaces filled.

After the purchase, Edleun invests $200,000, primarily by improving the property. It introduces its nutritious menus and standardized learning program.

Occupancy rises from 80 per cent to 95 per cent despite a 5 per cent fee increase. Revenue goes from $662,000 to $825,000, and EBITDA climbs from $200,000 to $265,000.

The improved business leads to a higher implied rent, so the building’s value goes from $1-million ($800,000 plus the $200,000 in improvements) to $1.3-million.

And the business, which Edleun bought for three times its EBITDA (minus $80,000-a-year implied rent) is now worth 9.5 times EBITDA minus a new, implied rent of roughly $100,000 a year, or $1.53-million.

So, through one $200,000 investment and the implementation of the Edleun way, the value of the building and business more than doubles, from $1.16-million to $2.83-million.

Mr. Olin, an Edleun board member, does not dispute this scenario (and, in fact, subsequently hired Mr. Roberts to work for him at Vision Capital).

Edleun says it has already driven its same-centre occupancy from 79 per cent to 89 per cent since taking over, increasing same-centre revenue and operating profit by 28 per cent and 43 per cent, respectively.

However, we have heard variations on this theme before in the world of the “roll-up,” where companies buy up pieces of a fragmented industry at one, low EBITDA multiple, put those pieces together, and get a public valuation with a much higher EBITDA multiple. The problem is that the acquiring has always been the easy part; it’s the integration and operation where many, many roll-ups have stumbled.

It seems strange that in a country that supposedly has such a shortage of day-care options that there would be so many underperforming centres for Edleun to acquire and spruce up, or that it has a clear path to, in their words, “’Cherry Pick’ prime sites with [the] best demographics and location enabling premium price.” (Edleun’s answer to this, Mr. Olin says, is that a modern centre takes more capital than today’s mom-and-pop operators can muster.)

Edleun stock trades for around 83 cents a share, but since it has net losses and doesn’t even have positive EBITDA, trailing multiples are elusive. Assuming it can post about $8-million in EBITDA in the next year, as Standard & Poor’s Capital IQ does, Edleun’s enterprise value — market capitalization plus debt — is about 10 times EBITDA.

It is, in other words, already priced at the kind of multiple Edleun should command if everything goes right. Which would give investors an expensive education if Edleun can’t execute its profitable scenario.

Ontario’s problem is not that it has big government, per se. If you want to see that, on a per capita basis, head to Alberta or Quebec. As the commission correctly noted, “Ontario runs one of the lowest-cost provincial governments in Canada relative to its GDP and has done so for decades.”

Ontario is at or near the bottom in funding universities. The health-care system is not the most expensive in Canada; the welfare rates are not the most generous. It doesn’t offer $7-a-day daycare, as in Quebec.

No, Ontario’s problem is that the size of its government doesn’t fit its revenues, and hasn’t for a long time. Those revenues have been hit by the slow, steady erosion of Ontario’s competitive position, in the face of which governments kept adding spending for which there were insufficient revenues.

As a result, like the frog in boiling water, the province’s fiscal situation slowly weakened. Over the past quarter of a century, Ontario’s debt ratio more than doubled to 35 per cent from 14 per cent. Ontario now finds itself lumped in with the three Maritime provinces; unless it changes course, it will find itself level with Quebec’s 50-per-cent ratio.

For most of the past decade, Ontario’s growth rate lagged behind the rest of Canada. From being an economic motor for the country, capable of sharing its surplus, Ontario became a drag, incapable of sharing but still required to do so by the perversity of various federal-provincial programs.

Worse, Canada entered into a form of the dreaded “Dutch disease,” whereby the currency soars on the back of high commodity prices, thereby diluting the economy’s competitive position. Ontario has suffered from the Canadian version of “Dutch disease”: High oil prices and large oil exports keep the currency high, causing competitive problems elsewhere.

Ontario has itself to blame, too. Its companies, like many across Canada, didn’t innovate enough; its wage rates in too many industries were uncompetitive; and – to come to the nub of the Drummond report – its public sector was too flabby for the revenue base on which it rested.

The largely unionized providers in all major public services – health, K-12, universities, courts, policing – essentially took new moneys the provincial government poured into their institutions and turned them into wage gains rather than productivity improvements.

Since about half of the provincial budget is taken up by wages and benefits for the million or so public-sector employees, higher remuneration coupled with no productivity gains spelled trouble. Under Premier Dalton McGuinty, these wage gains bought labour peace but no corresponding improvement in output, a politically satisfying but economically deadening outcome.

Governments, especially the McGuinty government, refused to tell the truth to the electorate. They kept assuming, and hoping, that the robust economic times of yesteryear would return. And they did two things simultaneously: They refused to raise taxes, and they kept on adding new spending programs or letting existing ones expand. In the last election campaign, none of the parties came remotely close to levelling with the voters.

The NDP answered every challenge with a call for higher corporate taxes, as if that alone would make difficulties vanish. A more puerile, populist response could scarcely be imagined, except for those proposed by the other parties.

The flight from reality that has characterized Ontario’s political culture has been completely challenged by the Drummond report. There’s no longer any place to hide – although, if one exists, we can expect the politicians at Queen’s Park to discover it.

Mr. Drummond’s mandate precluded any study of tax hikes. Ontario will need them (a rise in the sales tax and personal income tax surtax on the affluent), along with serious spending restraints, to climb out of the fiscal hole so accurately and painstakingly described by Mr. Drummond’s team.

Some school boards currently offer their own full-day kindergarten program at some or all of their elementary schools. Boards will continue to offer those programs in schools that are not yet part of the new full-day kindergarten program.

Talk to your local school principal or school board staff for more information about their other kindergarten programs and registration.

Ontario Full Day Kindergarten 2012 - View School List