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MINNEAPOLIS-Best Buy Co. has agreed to pay $685 million to buyMusicland Stores, and will merge two of thetop three Twin Cities-based retailers to create thenation’s largest music retailer.Best Buy, based in Eden Prairie, MN, also said it ispaying $87 million to buy Magnolia Hi-Fi, aSeattle-based high-end consumer electronics chain, andis expanding into Canada with 15 stores in the nextyear or so.

Best Buy’s chief executive Richard Schulze touted thedeal to buy Musicland, based in Minnetonka, MN, as away to get to a whole new base of customers–womenshoppers at Musicland’s Sam Goody stores in malls,rural shoppers at its On Cue stores in small townsand tech-savvy shoppers at Magnolia. He also arguesthat adding consumer electronics products, such as MP3players and other wireless and digital products willbe able to pump up sales at Musicland’s more than1,300 stores.

“We have plans to transform Sam Goody stores with newtechnology products, and we expect it to be ameaningful expansion strategy for us,” Schulze says.But investors are worried about increased exposure toa weak and threatened music retail industry, about thenegative short-term impact the deal will have on BestBuy’s earnings and about spending so much cash whenthe economy is taking a downturn.

Also, it’s unclear what impact the merger may have onMusicland’s corporate staff, although both companiesinsist no layoffs are imminent. Best Buy spokeswomanLaurie Bauer says it hasn’t yet been decided if BestBuy will move Musicland’s corporate operations to thenew corporate campus it plans to build in Richfield.Best Buy, with 413 stores in 41 states, says theacquisition does not affects its plans to open its ownBest Buy stores at an annual rate of about 60 in thenext four years.

Meanwhile, Best Buy has growth plans for its newacquisitions. Schulze likes On Cue, which has 200stores in areas with a population of less than 30,000,and he anticipates that about 75 On Cue stores couldbe added each year, as the US market could handleabout 750 of the stores.

Magnolia Hi-Fi, based in Seattle, had sales of about$100 million last year and has 13 stores inWashington, Oregon and California. Schulze says hisstaff has identified about 150 potential sites forfuture Magnolia stores.In Canada, Best Buy has signed eight leases andexpects to open about 65 stores there over three yearsbeginning in fiscal 2003.

Both Musicland and Magnolia will operate autonomouslyas wholly owned subsidiaries, Best Buy says. TheMusicland deal is expected to be completed in thefirst three months of next year, while the Magnoliadeal is expected to be completed by mid-December.

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