Market report: Wednesday close

MANCHESTER United has been shown the red card by its own broker, Merrill Lynch, which claims to have found a £4.5m black hole in next year's profits.

Merrill's Andrew Burnett warns that next year's proposed restructuring of the European Champions League will change the way clubs are rewarded after the first round. At present, it is based on a second group stage involving league tables, but the proposals are for a knockout system.

MU stands to lose millions of pounds because there will be fewer games. Merrill has downgraded its 2004 forecast of pre-tax profits, before player trading, from £44.4m to £39.2m.

Yesterday it told the board to stop acting like Scrooge over dividend payments to shareholders. The club has proposed a 4p payment, which includes a special Beckham dividend worth 1.5p, but Merrill says the payout should be nearer 11p. There was a two-way pull in the shares, up 1/2p at 196 1/2p, in heavy turnover of 10m.

Brokers say the price remains underpinned by a handful of large stakes in the company, fuelling talk of another bid.

Satellite broadcaster BSkyB was 1/2p off at 614p after announcing that it had reached its target of seven million digital subscribers three months early. That will serve as a big pat on the back for outgoing chief executive Tony Ball. The group has now set its sights on eight million subscribers by the end of 2005. Brokers say the BSkyB share price is likely to remain overshadowed by the prospect of an EU inquiry into television rights.

The rest of the market clawed back some of their recent losses underpinned by an opening rally for the Dow in New York this afternoon. Once again, it was the financials that led the way with Abbey National up 23 1/2p at 517 1/2 and Barclays up 23p at 487 3/4p. The FTSE 100 index ended up 77.9 at 4169.2.

Oil and gas explorer BG Group jumped 7 1/2p to 260 1/2p after a meeting with broker Cazenove. Steelmaker Corus dipped 1/4p to 20 1/2p on heavy turnover of more than 170m shares. US securities house Morgan Stanley has repeated its underweight stance on the shares and cut its 2004 earnings estimate by 48%. Broker ABN has downgraded from buy to hold and says the recovery has fallen by the wayside.

Private investors rushed in for British Energy on learning that the deal to convert £1.3bn of debt into equity had finally been agreed. The ordinary shares returned from a brief suspension 0.03p up at 5.38p on turnover of 23m while the non-voting A shares marked time at 2.25p, having briefly touched 4.5p.

The shares are being bought as a recovery play but traders say give them a wide berth. The banks now have overall control and the issue of extra equity means that existing shareholders have been diluted to less than 3% of the total. Small investors will walk away emptyhanded, as in the case of Marconi.

Magazine publisher Emap stood out with a rise of 25p to 800p after Deutsche Bank raised its recommendation from hold to buy and lifted its 12-month target price from 840p to 890p.

Logistics group Exel rose 29 1/2p to 692p. Broker Dresdner Kleinwort Wasserstein has upgraded from hold to buy and lifted its target by 50p to 800p. It complains that the underperformance in the shares this year is unwarranted.