Why Walgreens Boots Alliance Investors Are Seeing Red Today

What: Shares of global pharmacy giant Walgreens Boots Alliance (WBA +0.01%) were down by more than 10% on heavy volume today after the company released its fourth quarter earnings results, during which time it confirmed the rumor that it is buying out rival chain Rite Aid (RAD +0.00%).

So what: For the fiscal fourth quarter earnings grew 19% to $0.88, which topped analyst expectations of $0.81. However, revenue of $28.45 billion came in a bit lighter than the $28.86 that Wall Street expecting.

For the fiscal full-year 2015 earnings grew 18% to $3.88 off of revenue of $103.44 billion, which was also mixed compared to analyst expectations of $3.80 and $103.47 billion, respectively.

Of course, actual results are certainly being overshadowed by the news that Walgreens has agreed to Rite Aid for the tidy sum of $17.2 billion in an all-cash transaction. That values Rite Aid shares at $9.00 even and represents a huge 48% premium when compared to the shares closing price October 26th.

Walgreens will be financing the transaction through a combination of existing cash, assumption of existing Rite Aid debt and issuance of new debt. Given that Walgreens only had $3 billion of cash on its books as of August 31, its debt load looks like it will be massively expanded, as it could leave the company nearly $30 billion on its books if the deal goes through.

News of the deal caused Walgreens to slightly lower its 2016 outlook, as it now sees the company earnings $4.25-$4.55 per-share, which is slightly lower than the prior outlook for $4.25-$4.60. Walgreen's lowered the outlook as it will be suspending its $3 billion share repurchase program to help fund the transaction.

Walgreen believes that this deal will begin to be accretive to earnings after its per share in its first full year after completion

Now what: For the time being, Walgreens has decided to keep the Rite Aid brand name, but it has admitted that it may change its mind on that decision down the road. Walgreens expects to realize synergies in excess of $1 billion, through a combination of savings on expenses through lay-offs and store closures, as well as more favorable negotiation power with drug makers. The company also hopes to realize savings from compliance and regulatory requirements, mostly related to the Affordable Care Act.

At this point the question on the forefront of investors minds is whether the Federal Trade Commission would approve a merger of drugstores between the No. 2 and No. 3 placers in the industry. Given that this merger would create a pharmacy duopoly in the U.S. with the current market share leader CVS Health (CVS +0.00%), investors are right to be concerned as there are precedents at the FTC for blocking such transactions.

The market is also punishing shares of Rite Aid today as its shares are currently trading for just over $8, which is a far cry from the $9 buyout offer. Given the uncertainty and fact that the deal doesn't close until the "second half of calendar 2016", investors appear to be taking the gains and running. Only time will tell if that is the right decision.