Warner Music, the recording arm of US media giant Time Warner, has been sold for $2.6bn (£1.5bn) to investors led by Canadian media mogul Edgar Bronfman jr.
REM are one of the acts on Warner
UK music firm EMI pulled out of the bidding, when Mr Bronfman and his group of US investors trumped its offer.
The deal will reduce Time Warner's debt mountain and bring ex-Seagram and Universal Music boss Mr Bronfman back on to the media scene.
Analysts, meanwhile, say that EMI could now become a takeover target itself.
EMI - featuring artists like Kylie Minogue, the Red Hot Chilli Peppers and Robbie Williams - had hoped to achieve cost savings of up to $300m, while adding acts such as Madonna and REM to its roster.
Merger mania peters out
But the regulatory obstacles would have been formidable and are likely to have scared Time Warner off.
Fourth biggest music group, after
Universal, Sony, EMI
Artists: Madonna, Alanis Morissette, REM, Missy Elliott,
Red Hot Chili Peppers, The Darkness, Eric
Clapton, Linkin Park and others
Labels: Warner Bros, Atlantic, Elektra, Rhino, Word
Earnings: $4.2bn (2002)
Market share: 11.9% (2002)
Selling to EMI would almost certainly have left Time Warner owning at least a few smaller record labels.
Mr Bronfman and his group of investors - including venture capital firms like Thomas H. Lee Partners, Jr.'s Lexa Partners, Bain Capital and Providence Equity Partners - currently hold no large stakes in music companies.
"Warner Music Group is one of the world's greatest recorded music and music publishing companies, and we have great faith in its potential for growth as an independent company and in the long-term opportunities of this industry, " Mr Bronfman said in a statement.
Warner Music chief executive Roger Ames praised Mr Bronfman's "passion for the music business" and his "understanding of the creative process".
"I have every confidence that Warner Music will thrive under
Edgar's leadership," said Mr Ames.
But Times Warner will retain an option to buy back 15% of the company within three years, and possibly up to 19.9% under certain circumstances.
EMI fails to merge again
EMI's withdrawal means it has now lost out in three merger attempts in just three years, following earlier talks with Warner Music and another negotiation with Bertelsmann music unit BMG.
Excluded from a general industry consolidation, EMI may itself now become the target of takeover moves.
Newspaper reports over the weekend suggested that EMI could in line for a takeover bid, from US private equity firm Blackstone.
The group could offer as little as £1.5bn for EMI, the Observer newspaper reported.
Shares in EMI, the world's third largest record company, gained 1.7% in morning trading, boosted by an upgrade recommendation from investment bank Goldman Sachs.
EMI shares suffered late last week when the rival bid first edged into the lead.
Besides regulatory issues, the failure to agree terms suggested that Time Warner was keen to offload all its music assets in one go.
EMI's bid had only been for the recording side of the business, while the Bronfman-led deal promised to take the publishing arm off Time Warner's hands as well.
Analysts said that this made EMI's offer less tempting, as the US media giant was keen to pay off debt as quickly as possible.
"This really shows that Time Warner wants out of the music business," Accenture media partner Theresa Wise told the BBC.