Once it was that Hutchison Whampoa's massively profitable ports and ferry operation was the only thing standing between its telecom aspirations and the deep blue sea. After being bailed out by the group for so long, the foundering telecoms business - which was loved on the stock market not because of its operating profits but because of the wild oscillations of its share price - there is hope that the operations may be able to float on their own now, analysts say. 'Hutchison achieved positive free cash flow last year for the first time since 1999. The business is improving this year and the conglomerate's prospects seem to be okay,' said Rob Hart, an analyst at Morgan Stanley Asia. Perceptions in the market that the troubled conglomerate is speeding up the spin-off of its loss-making 3 Italia division has helped to shore up the stock's controversial valuation. With Hutchison's telecom business accounting for the biggest portion of its valuation, an analyst at a French investment bank said that when news leaked in early December of a delay in 3 Italia's listing, Hutchison's share price slumped immediately to about $70 from its previous $80. 'It is exactly what concerned the market most,' said the analyst, whose bank had upgraded the 12-month price to $94 from $85 late last year on expectation of the 3 Italia deal. Despite the hardships of the sector, the telecom business accounts for 27 per cent of the group's forward enterprise value of $553.8 billion, according to UBS. This is followed by its cash cow - container ports and ferry operations - which accounts for 24 per cent of the forward enterprise value. To bridge the profit shortfall, analysts expect Hutchison to accelerate its spin-off plans, which include relaunching its 3 Italia listing next month and perhaps hive off of Hutchison India and 3 UK later in the year. While 3 Italia is a 95 per cent-held subsidiary of Hutchison, 3 UK is wholly owned. Hutchison India is 53 per cent held by Hutchison Telecom (HTIL), a telecom arm focusing on emerging markets. 'Being worried that 3G losses would eat into non-3G operating profits, it is understandable that Hutchison would eye major telecom stakes sales as the only way of offsetting coming 3G losses,' said one European banker. 'The 3 Italia deal could be anchored if Hutchison cut the flotation size by a marginal degree with a more reasonable valuation. 'As most analysts have wiped out a great deal of the 3G value from the [net asset value] already, any reasonable valuation would enhance NAV anyway,' he said. The banker also said that 3 Italia's efforts to become a mobile-media company through its acquisition of Channel 7 - a pay-television network operator - would give it an edge over its rivals. The enterprise value of 3 Italia ranges from a low of Euro9 billion ($84.3 billion, by Credit Suisse First Boston) to a high of Euro12 billion, together with total debt of more than Euro5 billion. But as the size of the initial public offering is expected to shrink, so is its enterprise value. UBS estimates that Hutchison needs to throw a further $36 billion into 3G capital expenditure in 2005-06 before it can get anywhere close to an operating profit of $10 billion in 2007-08. It is expected that 3G will not generate a positive net profit until 2008. The strategy employed by Hutchison is clear - to build a sizeable customer base as soon as possible to bridge the profit shortfall from operating losses in 3G. Given the intense competition and high cost of securing new customers, profit margins and average revenue per user, are deteriorating. In Italy, average revenue per user was down from Euro50.47 in the first seven months of 2004 to Euro35.80 in the 12 months to June last year. And in Britain, it was down from #43.22 ($592.10) to #33.83 during the same period. Nevertheless, price incentives are luring new customers. According to Hutchison's interim report, its 3G customer base had grown to 4.52 million in Italy and 3.21 million in Britain in August last year, compared with 1.36 million in Italy and 1.2 million in Britain in the same period the previous year. With the European market looking stronger, Hutchison is turning its attention to emerging markets - especially in the Middle East. Last month, Hutchison made a strategic move by offloading 19.31 per cent of its stake in its 69.1 per cent-held subsidiary, Hutchison Telecom (HTIL), to Egyptian mobile operator Orascom Telecom. The deal - which netted Hutchison $10 billion - was, more importantly, strategically sound because it has provided scope for merging operations and eliminating unnecessary competition. The union is said to be a perfect match as Orascom runs GSM networks in seven emerging markets, including Egypt, Italy and Algeria, none of which overlap with HTIL's operations. The alliance has developed a stronghold in markets such as the Middle East, South Asia and Africa. The exception is Italy, where both sides have competed through their respective vehicles, Wind and 3 Italia. Andrew Chetham, principal analyst of Gartner Research, said that unlike in Europe, Hutchison had little knowledge of doing business in Middle Eastern countries, and that it was natural for the group to link up with a firm that did. A senior manager at Hutchison said that the group had been seeking more than the $10 billion in the Orascom deal. 'Although a further merger of both telecom operations in the emerging markets cannot be ruled out, the logical thinking is that the partnership will create synergies in the procurement of infrastructure facilities and handsets.'