Monday, September 24, 2007

The Cost of Changing Stripes

When you borrow to buy a more expensive house, your mortgage goes up. The same happens in business, and two such deals just hit San Angelo. CHS recently purchased Community Medical Center of San Angelo and Susser Holdings plans to acquire Town & Country Food Stores within 90 days. Both new owners have or will take on significant debt as part of the transaction.

Community Health System borrowed some $10 billion to finance their takeover of Triad Hospitals and SACMC. Annual interest on this debt is $660 million, a $440 million increase over the combined annual load of the two independent firms. That works out to over $3 million per hospital in the investor owned hospital chain.

Susser plans to finance the $361 million purchase price of Town & Country with cash, lease financing and debt. Their latest balance sheet indicates only $20 million in cash, so most of the deal will have an interest cost. Susser already has long term debt of $120 million. Once that nealry quadruples to $470 million, what will happen to interest charges? It will shoot up from ther $23 million in interest expense in FY 2006. Assuming the same ratio of interest to long term debt, the new number should come in around $90 million. Those costs will need to be passed on to customers in higher prices or operating expenses will need to be slashed. Per store the new interest expense amounts to $180,000. How many T & C's are in San Angelo? My phone book says 27, making the total annual debt burden close to $5 million.

Two deals stand to hit locals in the pocketbook for an additional $8 million. Is that progress?