BHP Group can't cherry pick Anglo American assets without paying a hefty premium, Anglo investors told Reuters, concerned that they stand to lose heavily by holding shares in South African subsidiaries.

The world's No. 1 miner is weighing up its next move after its initial $39-billion takeover proposal for smaller rival Anglo was rejected last week. The proposed premium was 31% on Anglo's implied value.

BHP has proposed that Anglo sell its shares in units Anglo Platinum (Amplats) and Kumba Iron Ore as an option to exit the South African assets it doesn't want included in the deal.

Anglo said the unsolicited proposal significantly undervalued the company and introduced uncertainty, complexities and execution risk.

If the BHP proposal goes ahead, Anglo investors "could be stuck with three pieces of paper for a deal that could take a long time to close," a source at a Cape Town-based fund manager told Reuters.

The process to de-merge South African assets could take as long as 18 months, the source added, due to various regulatory processes that the transaction would need to go through. There is a risk that South African regulatory authorities, particularly its central bank, could be concerned about capital outflows from foreign investors not willing to hold the shares, the source added.

"BHP could just make it a clean offer and then it's up to them to deal with the unbundling of the shares," the source said. "When the deal goes through they unbundle Amplats and Kumba to their shareholders."

Amplats and Kumba's share prices could also come under significant selling pressure if the units were demerged, as several shareholders would not be able to hold the stocks as these are in South Africa, another source familiar with the companies said.

The majority of shares in Kumba and Amplats are sitting in liquid hands, the source said. "So the 30% premium is going to get eaten up by the loss on those other shares tanking."

CHERRY-PICKING
"I think it (the current bid) ... places all of the risk on Anglo shareholders," said Django Davidson, partner and portfolio manager at Hosking Partners, which holds shares in Anglo.

"BHP wants to buy the good bits without any of the friction of disposing of the bad bit. It's by no means clear what the de-mergers would mean for the relationship with the South African government and what the underlying commodity prices will do over that period," Davidson added.

BHP has until May 22 to submit a binding offer and investors anticipate the company to sweeten its bid.

"BHP is seeking to make Anglo some sort of an agent for their own deal," Shane Watkins, chief investment officer at All Weather Capital, said.

All Weather Capital holds shares in Anglo and BHP and Watkins said the nation's central bank is unlikely to approve the transaction if Anglo opts to de-merge its South African units.

"Anglo must tell BHP they don't like the deal or that they should buy the whole company, BHP can't cherry-pick," another source said.