BHP may have to sweeten Rio bid: fund manager

NEW YORK (Reuters) - BHP Billiton's (BHP.AX) might have to sweeten its $147.4 billion bid for rival miner Rio Tinto (RIO.AX) to win over shareholders, one fund manager said on Wednesday.

The comments came as BHP (BLT.L)(BHP.N) boosted its initial approach by 13 percent, offering 3.4 shares for each Rio (RIO.L) share. Rio spurned the new offer after previously rejecting a proposal of three shares.

The deal has been complicated by state-run Aluminum Corp of China (Chinalco) buying 12 percent of Rio's London-based stock in partnership with U.S. aluminum producer Alcoa Inc (AA.N).

"BHP may have to raise its offer even more and they may have to add a cash component," said Brian Hicks, co-manager of U.S. Global Investors' global resources fund.

"Now that Chinalco is involved in Rio Tinto, there may be greater support from Australia's government for a BHP-Rio Tinto deal to create a larger, stronger mining company.

"China has been buying into smaller natural resource stocks in Australia, so we may see some nationalist sentiment," said Hicks, whose fund in San Antonio contains mining stocks.

Shares in BHP tumbled 7.5 percent to A$36.66 on Wednesday in Sydney -- their steepest one-day percentage fall in 20 years. They ended 4.8 percent weaker in London and down 4.9 percent at $66.10 in New York.

Rio shares ended the day in London at 54.17 pounds -- 4.6 percent higher than the value of BHP's offer, suggesting investors were counting on BHP bumping up the bid again. BHP needs at least 50 percent of holders of Rio's Australian and London shares to accept.

Several Rio shareholders said BHP's bid was not enough to win them over and create the world's third-richest company, behind only Exxon Mobil (XOM.N) and General Electric (GE.N).

"It's a lot fairer than the offer we've had before, (but) it's by no means a knock-out offer," said Bertie Thomson, a fund manager at Aberdeen Asset Management (ADN.L), who holds both Rio and BHP shares.

Chinalco and Alcoa, with funding available from China Development Bank, have reserved the right to make an offer for Rio if there was another bid, but sources familiar with the situation told Reuters the Chinese, just beginning the Lunar New Year holiday, were in no rush to make a move.

One Wall Street analyst said Alcoa's involvement could be aimed at acquiring assets of Canadian rival Alcan AL.TO, which it tried to acquire last year, but lost out to Rio.

"The Chinese don't really care about aluminum. So if they were wanting to go for iron ore and other assets, Alcoa would be there to pick up certain pieces that they don't want or need," said the analyst who declined to be identified.

Since the Chinese have more than enough aluminum production capacity, Alcoa would be a logical partner to make sure they have a seat at the table if the Chinese do make a move, the analyst told Reuters.

(Reporting by Steve James; Additional reporting by Jim Regan in Sydney, Eric Onstad in London and Carol Vaporean in New York; Editing by Gary Hill)