GUITAR CENTER PLANS MERGER; FIRM TUNES UP FOR E-COMMERCE.

Byline: Ben Sullivan Daily News Staff Writer

Guitar Center Inc. said Thursday it will merge with an Oregon mail order and e-commerce company to become the world's largest seller of musical instruments.

In a deal announced after the close of U.S. markets, the Agoura Hills-based firm said it will be the surviving entity in a $50 million pooling of interests with Medford-based Musician's Friend Inc. The deal includes a one-for-one stock swap valued at $33 million and the assumption of about $17 million in Musician's Friend debt.

The Oregon company is the nation's largest catalog retailer of musical instruments and operates nine brick-and-mortar stores in Oregon, Colorado, Louisiana, Tennessee, Utah and Washington. Musician's Friend had 1998 sales of $97 million, with roughly $4 million coming from online sales. By comparison, Guitar Center's 52 stores generated sales of more than $391 million in the same period.

Marty Albertson, chief operating officer of Guitar Center, said the proposed merger fulfills his company's longstanding goal of dominating online instrument sales.

Other than Guitar Center and Musician's Friend, ``There's nobody else out there with a full-service musical instruments e-tailing site,'' Albertson said. ``And this obviously puts us at the leading edge of catalog sales as well.''

Albertson said Guitar Center will continue to operate its own e-commerce Web site, which generates negligible revenue, but will use the Musician's Friend fulfillment center to speed delivery of orders.

The merged company, which will retain the Guitar Center name and Agoura Hills corporate headquarters, will have a relatively complex management structure. Larry Thomas, Guitar Center's chairman and chief executive, will be chairman of the new company and co-CEO along with Albertson. Musician's Friend CEO Robert Eastman will become CEO of the new company's online and catalog business, and will be a member of the company's board of directors.

``It is a little weird, but it's a good way to initially manage three complementary but very different lines of business,'' said Bank Boston analyst Sara Craig. Craig said Eastman should bring Guitar Center needed strength in the online sales arena.

Under terms of the deal, Musician's Friend's nine retail outlets will be converted to Guitar Center shops. Because of their location in smaller, secondary markets, they will give the organization a chance to better study that niche, Thomas said.

News of the proposed merger, which must be approved by Guitar Center shareholders, came after the close of U.S. markets. The stock closed at $16.75 Thursday, up 25 cents.