The takeover, which would give London Clubs a bigger slice of the capital's gaming market, will almost certainly be referred to the Monopolies and Mergers Commission and will need approval from the Gaming Board, the industry watchdog.
London Clubs runs seven casinos in the capital, including the Ritz club and Les Ambassadeurs, which are aimed at so-called "high-rollers" - wealthy gamblers such as Kerry Packer or the Sultan of Brunei who typically win and lose millions each night. Capital Corporation owns and operates Crockfords and the Colony Club, two casinos in the exclusive Mayfair area of London.
"The nature of the businesses operated by both companies will ensure that they are integrated efficiently and with minimal disruption," said Alan Goodenough, London Clubs' chief executive. The merger would give London Clubs a better chance of winning tenders overseas, he said.
Last month London Clubs, which also operates five clubs in France, Egypt and Lebanon, paid pounds 30m for a quarter-share in a new Las Vegas gambling and hotel complex in the first move by a Britishcompany into the highly lucrative US casino market.
London Clubs is offering 47 of its new shares for every 100 Capital Corporation shares. There is no cash alternative.
The offer represents more than 30 times Capital's forecast earnings for 1996. "We are making a full and generous offer compared with other recent casino acquisitions in London," Mr Goodenough insisted.
But in a statement Capital Corporation, led by Gary Nesbit, former head of Our Price Records, rejected the bid, saying it was unwelcome and undervalued the company. Shares in Capital closed 14.5p higher at 186p, against the 181p offer price, while London Clubs ended 6.5p weaker at 378.5p.
London Clubs' offer comes just six weeks after Capital Corporation issued a profit warning, saying 1996 would be hit because high-rollers had stayed away from the roulette wheels and green baize in the run-up to Christmas.
Mr Goodenough confirmed that London Clubs had approached Capital about an agreed takeover shortly after the profits warning, but talks broke down over price.
"We spoke to them three weeks ago," he said. "There might have been somebody else talking to them on a fairly frivolous basis but we weren't horsetrading. We wanted to let shareholders decide on the logic of our bid."
Mr Goodenough said the outcome of the bid rested with half a dozen investors who spoke for about 50 per cent of each company. He denied the bid was a defensive move to thwart the likes of Ladbroke, who were keen to expand their casino operations in London.
There are 117 licensed casinos in Britain and operators are seeking to lift a number of restrictions, including a ban on the use of credit cards by customers. Gamblers must also wait 48 hours between filling out a membership application and being allowed to play the tables.
Ministers have already proposed some measures to deregulate the industry, including liberalisation of strict rules governing advertising.
The world casino market is undergoing a dramatic consolidation. Hilton's hostile bid for ITT, owner of the Sheraton hotels, is partly driven by the desire to own ITT's gaming businesses.