Online music and video distributor Digital Music Group Inc. and New York-based indie music download service The Orchard have agreed to merge. While the merged entity will retain DMGI’s Nasdaq listing, it will be controlled by Orchard and it will market its services under The Orchard’s name.The deal calls for Sacramento-based DMGI to issue 9 million shares of common stock and 4.4 million shares of convertible preferred stock to The Orchard’s shareholders, who would own 60 percent of the combined company.

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Current Orchard president and CEO Greg Scholl will head the combined company. DMGI CEO Mitchell Koulouris is leaving the company and handing the reins to Karen Davis, DMGI’s CFO, who will serve as its interim CEO until the merger closes. The deal is expected to be finalized sometime during Q4. The combined company claims to bring together roughly one million musical recordings as well as thousands of hours of TV, film and video programming. Release

For 2006, The Orchard had revenues of $14.9 million and gross profit of $4.2 million, and DMGI reported pro forma revenues of $10.2 million and gross profit of $2.4 million. For Q107 The Orchard had revenue of $5.6 million and gross profit of $1.4 million, and DMGI reported revenues of $3.4 million and gross profit of $0.8 million. Both companies operated at a net loss for the periods.

Rafat adds: The Orchard is owned by Dimensional Associates, the private equity arm of JDS Capital Management which also owns eMusic. DMGI was the first digital music company to go public in February 2006 at $8.50 a share, but the stock price has fallen sharply since. It closed yesterday at $3.99 a share, and is up today trading at $4.30.