Time Warner, the world's biggest media-entertainment company,
has set a Sunday deadline for a deal to sell its music unit.
Madonna belongs to the Warner music stable
UK music group EMI had been in pole position to take control of Warner Music, whose artist roster includes Madonna, Led Zeppelin and REM.
Now a private consortium led by former Seagram boss Edgar Bronfman has the weekend to finalise a rival $2.5bn (£1.47bn) bid.
Shares in EMI ended 3.83% down on Friday as it appeared to the market that its rival bidder had edged ahead.
The consortium's offer may trump EMI's bid, scuppering its takeover plans.
EMI shares closed at 163p, down 6.5p, having fallen by more than 10% early on Friday morning.
Two horse race
The private consortium, which also includes Haim Saban, was initially thought an unlikely competitor to EMI, which is offering $1.6bn for a smaller part of the Warner music empire.
EMI is interested only in the Warner recording unit, and its bid would allow Time Warner to raise extra cash with a separate sale of its music publishing business.
EMI is also offering Time Warner a 20-25% stake in the combined music company.
But there is speculation that Time Warner is edging closer to a deal with the Bronfman-Saban consortium, attracted by the prospect of a cash windfall and a simpler divestment of its music business.
There are also fears that an EMI-Time Warner tie-up, which would represent a massive consolidation of the music industry, could run into EU and other regulatory hurdles.
Analysts said EMI's chances of pulling off the deal had waned.
"This is bad news for EMI. Warner Music is moving further down the horizon if not disappearing altogether," said Simon Baker at SG Securities.
"But it is not out of possibilities, and that is why the shares are not down more severely."
EMI may yet come forward with a more generous bid.
EMI chairman Eric Nicoli described EMI's existing offer as "full and fair," but said the company would make a further announcement when it had reached a "definitive" conclusion.
The battle for Time Warner music comes as industry rivals Sony and Bertelsmann are in the process of seeking approval for a 50-50 joint venture that would create the world's biggest record company.
The Bronfman-Saban group offer includes an option for Time Warner to keep a 20% stake in the music unit and an additional option on 19.9% if the new investors merge their acquisition with another company in the future.
If the private investors' bid is successful it would represent a surprise return to the music industry for Edgar Bronfman Jr, who sold Seagram to French utility and media group Vivendi in 2000.