TORONTO - Somerset Entertainment Income Fund (TSX:SOM.UN), maker of the Solitudes nature CDs, is being acquired by music distributor Fluid Music Canada Inc. (TSX:FMN) in a friendly $30.7-million deal.

The move, announced Tuesday, is intended to prepare both companies for the future of digital distribution and has the support of Somerset's board and major unitholders.

As part of the deal, Fluid will pay either $2.12 in cash per unit of the specialty music income fund or an equivalent in the form of common stock or convertible debt issued by Fluid, the companies said.

The pairing allows Fluid to merge its programing and broadcasting services and digital music sales with Somerset's in-store CD displays.

Fluid provides custom music programming for many North American retailers - such as Office Depot and French Connection - which plays over their soundsystems. The company had a market value of nearly $71 million as of Tuesday.

Somerset produces and distributes speciality music - including nature sounds and older music compilations - through non-traditional retailers like drug stores and big box superstores.

The company has built its presence by using interactive displays that allow customers to sample the CDs with the push of a button. Somerset employs more than 180 people at locations in Toronto, Illinois and Minnesota.

"The companies are very complimentary in terms of assets," Andy Burgess, Somerset's chief executive, in an interview.

"We like their vision... and believe that we can play an important role as a consolidator on the physical side."

Music industry analyst Larry LeBlanc said the two companies will be able to use each others resources to build market share as consumer music sales continue to struggle.

"Essentially they've got a company that is very exploitable in this time, and particularly in this environment," said LeBlanc of Somerset.

"Because the bulk of (the music) is instrumental it provides a lot of opportunities."

The deal also brings closure to longtime talks between Fluid Music and Somerset that stretch back more than a year.

In July 2008, Fluid had offered $4 per unit, payable in cash or units to acquire the business. When that was shot down by Somerset's board of trustees, Fluid returned with a cash-and-stock offer worth $48.6-million, which was also nixed.

Since then, the stock market has taken a nosedive and pulled down Somerset's unit value with it. On Tuesday, the company's stock was down three cents to $2.11, which is well below the recent peak value of $3.70 it had on July 25, 2008.

Today there are "very different realities in terms of where our stock has been trading at," said Burgess.

"The music industry is really hurting. Forget the economy, this industry is going through a fundamental transformation. While the other businesses are clearly going to come back, it's not clear that music is necessarily going to come back."

In the final agreement, Somerset's board of trustees determined the cash offer is fair and in the best interests of the company and its unitholders, the companies announced Tuesday.

The cash alternative is 1.1 common shares of Fluid or 0.003 of a $1,000 principal amount eight per cent of convertible unsecured debenture due in three years after the debentures are issued.

Somerset unitholders, who have approximately 66 per cent of the company's units, have entered lock-up agreements with Fluid and have agreed to tender their units to the offer.

"The merger of Fluid and Somerset represents a significant strategic step forward for the two of us," said Lorne Abony, Fluid's president and chief executive.

"Together, Fluid and Somerset should be well positioned to take 'first mover' advantage of the significant online specialty music opportunity," he added.

Abony is referring, in part, to the potential opportunity to build the combined company's presence with traditional retailers through their company websites.

In July, Somerset made a foray into the digital music world when it acquired online music store Puretracks for $3 million from majority shareholder Bell Canada (TSX:BCE).

The plan is to use Puretracks as a digital music distributor to websites of popular retailers - like Bed, Bath & Beyond, for example - and allow shoppers to order digital music alongside their towels and soaps.

"We're combining with some other major entities and try to convert some of their customer traffic to music sales," Burgess said.

"We're not going to go up against iTunes. We're going to take a completely different approach."

He hopes to build Puretracks into a $10-million-per-year digital business by 2010, which would nearly double its current revenue.

In 1994, Burgess co-founded Somerset with Gordon Gibson, the son of famed photographer and sound recorder Dan Gibson. Gordon's father was the creator of the parabolic microphone and the Solitudes nature recordings that were blockbuster sellers in the 1990s.

Gibson assumed control of his father's Solitudes business and brought it under the wing of Somerset.

Fluid shares closed unchanged at $1.35 on the Toronto Stock Exchange while Somerset shares were down three cents to $2.11.