The Government's decision came out of the blue, shortly after a ruling by the Radio Authority that the bid would not be against the public interest.
It took that decision after Capital Radio had given undertakings to ensure the news broadcasts on Virgin FM channel would be separately produced and presented, that the total amount of rock and related music on Virgin FM would be limited to 20 per cent, and any relaunch of Virgin FM would be delayed until Christmas 1997.
A joint statement from Capital Radio and Virgin last night said they continued to believe the proposed deal had no competitive implications . "We believe that these views will be endorsed by listeners and advertisers to the MMC," the statement said.
Capital's shares fell 31p to 475p, although they later recovered to close 15p down at 491p.
Capital has an estimated 42 per cent of the 9.8 million potential listeners in the London area and 62 per cent of the advertising spend, because of the preference of advertisers for the market leader and the higher charges Capital can levy for a given number of listeners. The addition of Virgin FM would give Capital 48.5 per cent of London's listeners and in excess of 70 per cent of the advertising spend.
Capital and Virgin also justify their merger on national grounds. Capital has only 8.91 per cent of the radio ownership and Virgin 4.3 per cent, and between them they fall short of the 15 per cent ceiling imposed by the Broadcasting Act of 1990. Virgin has a national AM network, but Capital does not. Only by merging can they develop a digital AM channel to challenge BBC Radio in the national market.
Chris Parry chief executive of XFM, a station due to start broadcasting in September, said the decision to refer the merger would allow the MMC to give clear guidelines on fair competition.