RSG | Press Page: Big Daddies Live for Payday Care

Two jobless men become stay-at-home dads and open their own day-care center - that's "Daddy Day Care," a 2003 Eddie Murphy film.

Wall Street profiteers flip the nation's largest day-care chain - that's "Big Daddy Day Care." It stars Henry Kravis of legendary buyout firm Kohlberg Kravis Roberts & Co. and Michael Milken, who popularized junk bonds in the 1980s, did two years in prison and is now a billionaire investor and philanthropist.

Last week, Kravis' firm said it would sell KinderCare for more than $1 billion.

The buyer was Knowledge Learning Corp., whose investors include Milken and his brother Lowell. My request to interview Michael Milken was denied.

Knowledge Learning operates 20 brands of day-care centers across the country. Once based in California, it acquired Children's World centers from Golden-based Aramark Educational Resources for $265 million last year. Knowledge Learning is now based in Golden.

When did day care get to be such a big business? The answer - in case you were too busy working to notice - is more than three decades ago.

In 1969, an Alabama real-estate developer named Perry Mendel recognized that mothers were increasingly working outside the home. KinderCare was born to capitalize on the trend.

In 1978, Mendel turned to Michael Milken's Drexel Burnham Lambert for junk bonds to finance expansion.

After real-estate prices and the economy slipped in the late 1980s, KinderCare couldn't pay its debts and filed bankruptcy in 1992. Mendel began serving a nine-month prison sentence on tax-evasion charges in late 1991 and died in 2000 at age 78.

KinderCare got out of bankruptcy in 1993. Kravis' firm paid $525 million for a majority stake in 1997 and has since run the company profitably.

The economics of child care are puzzling. When mothers take care of their own children, their work goes unpaid and is undervalued by a society obsessed with money and careers. For teachers and child-care workers, the pay is just a little better. But when you hand the kids to a bunch of Wall Street dealmakers, child care suddenly becomes a cash cow.

KinderCare reported $856 million in revenues for its 2004 fiscal year ended May 28. Most of this money came from the parents of 118,000 children who pay an average of $153 a week at one of KinderCare's 1,230 centers.

That's just the cash-flow story. The real-estate story is even more interesting. KinderCare expands by 16 to 30 centers a year, and in time this real estate becomes more valuable. KinderCare owns nearly 60 percent of its centers, which are worth $538 million, according to KinderCare's annual report.

Any time KinderCare's managers need a little KinderCash, they can sell one of these centers and lease it back from the buyer. They sold 41 centers for $89 million in fiscal 2004.

Given their success, the Big Daddies of day care get big pay. David J. Johnson, KinderCare chairman and CEO, received more than $2 million in compensation in fiscal 2004.

For the employees who must actually care for the children, it may take 100 years to earn that amount. Odds are they won't last in their jobs that long:

"The turnover of personnel experienced by us and other providers in our industry results in part from the fact that a significant portion of our employees earn entry-level wages and are part-time employees," KinderCare said in its annual report.

Big Daddy Day Care bills itself as "early childhood education." Most KinderCare kids are between 6 weeks and 5 years old. By the time they're old enough to know their teacher, their teacher may be off to a better job.

Educators do not agree as to what age children should start preschool.

Everybody gets thrown into the corporate thrasher, eventually. But Big Daddy Day Care makes me wonder what we're doing to kids so early in life.

We have replaced mother's milk with Michael Milken.