BHP's (BHP.AX) plan to divest the South African assets of its target Anglo American (AAL.L) are key to the strategy behind the proposed takeover and is expected to be a part of any revised offer, investors briefed on the miner's thinking said.
The "Big Australian" was rebuffed by its smaller rival on April 26 after submitting a $39 billion takeover proposal, in a plan seen as complex because it required Anglo to offload its shares in Kumba Iron Ore (KIOJ.J) and Anglo American Platinum (Amplats) (AMSJ.J) to Anglo American's shareholders before any deal took place.
Anglo American owns 78.6% of Amplats and 69.7% of Kumba.
South Africa's government is scrutinising the proposed deal. In comments to the Financial Times, the country's mining minister Gwede Mantashe said he was wary of BHP's proposal as the country's previous experience with BHP was "not positive".
But BHP sees advantages for South Africa in a distribution of the Kumba and Amplats shares, as it would boost the free float in those two companies, fulfilling a goal of the country's regulator, one fund manager that holds BHP shares said.
It would also trigger index-linked buying and put the assets in the hands of natural holders in South Africa, a second fund manager said.
"BHP have spent a lot of time looking at all the flow back implications and I'm confident they are all over it," one of the fund managers said.
BHP declined to comment, but referred Reuters to its May 2 statement that said the structure of its takeover proposal, including the proposed distribution of Anglo's shares in Amplats and Kumba to its shareholders, reflects the priorities for BHP's portfolio and opportunity for synergies.
FRESH PROPOSAL
The Melbourne-based mining company and its advisors have met with BHP investors over the past few days seeking feedback on the future of any deal, five sources with direct knowledge of the matter said.
The sources could not be named because of the confidential nature of the discussions.
BHP's investors have been supportive of the takeover but warned the company not to pay above the odds to secure control of Anglo, two of the sources said. Analysts, too, support a sweetened bid, based on long term prices of copper.
Macquarie analysts on Tuesday said BHP may be able to justify a 30-45% control premium partly due to cost efficiencies and higher copper prices, which would imply an Anglo share price of 27-30 pounds per share. The rejected BHP bid valued Anglo at 25.08 pounds ($31.44) per share.
Anglo American declined to comment, referring Reuters to its April 26 statement rejecting BHP's proposal.
BHP has been encouraged by at least one shareholder to consider keeping Anglo's stakes in Amplats and Kumba instead of exiting the South African assets.
A fully combined BHP and Anglo could look to sell those assets once the deal is completed, which would reduce the complexity and execution risk of the transaction, the person said.
Selling them at a later stage was unlikely to be taken up by BHP, said the first investor. "And so the premium has to be more."
"Anglo is probably pushing for a cash component, but we would probably prefer scrip," one fund manager said, adding that his fund's feedback to BHP has been minimal, "other than clearly the price has to change."
Under the initial plan, BHP stumped up an all-stock proposal that was considered a 31% premium to Anglo's closing price on April 23.
BHP has until May 22 to lodge a formal bid for Anglo. Reuters reported last month the Australian mining giant is considering making an improved offer.
($1 = 0.7978 pounds)
