The Competition and Markets Authority (CMA) is investigating Sony Music Entertainment’s acquisition of two Kobalt Music Group subsidaries, AWAL and Neighbouring Rights.
The watchdog believes the £312m deal, completed in May, could limit competition after an initial investigation.
The CMA found evidence AWAL was "well-placed" to compete with Sony in the future, recognising the music distributor as "one of few suppliers outside the major labels that succeeded in gaining a meaningful foothold in the market".
CMA's Senior Director Colin Raftery said the merger could worsen deals for many music artists in the UK, leading to less innovation across the industry.
Sony has said it is "perplexed" by the findings. The industry giant has until September 14 to address the CMA's concerns, before the deal is referred for an in-depth Phase 2 investigation.