The deal is subject to approval by the regulatory authorities. The Monopolies and Mergers Commission rejected Capital's pounds 87m bid for Virgin Radio on competition grounds after deliberating for six months, just after a consortium led by the Chris Evans, the DJ, had snatched control of Virgin with a slightly lower bid of pounds 85m.
David Mansfield, Capital Radio's chief executive, said the bid for Xfm would not be referred. Acquiring Xfm would give Capital Radio the two FM stations and one AM station in the London area, which it is allowed by the Broadcasting Act 1996. Unlike the acquisition of Virgin Radio it would not materially increase the group's share of the listening audience in London or the share of advertising revenue.
Xfm has only 0.6 per cent of the listening hours and even less of the advertising revenues. The station began broadcasting only last September and has lost up to 11 per cent of its initial audience in the last three months. Capital intends to inject more mainstream rock music into Xfm's playlist and introduce its expertise in marketing, advertising sales and programming.
"We are not collecting nuggets of gold here, we are acquiring a seam of gold but we have to dig to find it," a spokesman said.
Chris Parry, Xfm's managing director and co-founder, will continue as a director and retain the outstanding 9.9 per cent stake in the company.
After taking into account start-up costs, Xfm lost pounds 1.7m in the year to the end of December and the deal is unlikely to have a positive impact on Capital Radio's profits this year. The shares rose 30.5p to 660.5p.
Capital FM is already the market leader in London radio, with 15.5 per cent of the capital's audience, Capital Gold has a further 5.2 per cent. The group controls around 60 per cent of the commercial advertising revenue.