The Bronfman group on Monday beat an estimated $1 billion bid by EMI Group Plc for Warner Music, whose roster includes Madonna, Led Zeppelin and REM.
By choosing the Bronfman bid, Time Warner is forsaking as much as $300 million in cost savings it could have realised by combining with EMI, home to such acts as The Rolling Stones and Radiohead.
On the other hand, Time Warner is getting more cash up front by selling the entire business, which includes the music publishing company, and will have an easier path to regulatory approval.
In the past, European and US regulators have frowned on consolidation within the music business.
"It would have taken many months to complete a deal with EMI," Time Warner Chief Executive Dick Parsons told Reuters in an interview. The Bronfman deal is expected to close within 60 days, the company said.
Bronfman's team, backed by some of America's biggest private equity houses including Thomas H. Lee Partners, is betting that it can slash costs and turn Warner Music around ahead of a comeback in sales, a major challenge in an industry currently in decline.
Hit by rampant piracy and competition from other entertainment such as video games, music sales are expected to fall for the fourth year in a row in 2004.
For Bronfman, victory will give the Seagram scion another shot at redeeming himself in the entertainment industry after seeing his family investment in French-American media giant Vivendi Universal collapse in recent years.
Bronfman is a former songwriter
for Celine Dion and Dion Warwick
Bronfman has had long ties to the music business, first as a songwriter for the likes of Dionne Warwick and Celine Dion and later as head of Seagram when he bought entertainment group MCA from Japan's Matsushita for $5.7 billion.
On his watch, the renamed Universal Music bought Polygram, creating the world's largest record company.
Bronfman merged his family's entertainment empire with France's Vivendi three years ago, only to see the family fortune disintegrate. When Vivendi put its entertainment assets on the block earlier this year, Bronfman led a group to buy the assets back but was ultimately outbid by NBC.
As part of the deal, Warner will have the option to buy a 15% stake in Warner Music three years after the deal closes at a 25% discount from the assessed fair market value.
Time Warner will also have an option over a 19.9 % stake if Warner merges with a rival.
"The deal allows us to reach our balance sheet goals in one fell swoop and gives us the financial flexibility to Time Warner," Parsons said.
Parsons called the option to buy back in to the music business a key factor in the Bronfman deal.
Warner Music CEO Roger Ames will remain on the management team of the company, although his title has not been determined.