Shares in Anglo rose 8 per cent to almost £13 on Thursday — the biggest one-day gain in the stock for eight months. The share acquisition has not yet been completed, but people working on the transaction say it is expected to be finished by early next month.
"We doubt that the firepower exists for a fully blown takeover of Anglo American," says Paul Gait, analyst at Bernstein Research. Anglo is seven times larger than Vedanta.
"We see a more likely motivation as Mr Agarwal striking for a place on the Anglo American board, and therefore . . . to influence corporate activity, including Anglo's attempts to exit a significant chunk of its South African exposure."
Mr Agarwal, whose net worth was recently estimated at $3.2bn by the Hurun Rich List, has amassed a fortune buying bombed out mining assets from the Indian government and transforming their operations.
But people familiar with the billionaire's ambitions say that his dream is to build an Indian version of the world's biggest diversified miners such as BHP Billiton. It is through that lens that his investment in Anglo needs to be seen, say analysts.
Rather than using cash to finance his share acquisition, his bankers at JPMorgan are raising £2bn through the sale of mandatory exchangeable bonds. These bonds will be exchanged either for cash or Anglo shares in 2020.
"Basically Agarwal gets his hands on 12 per cent of Anglo for the next three years, in which time he can try and influence the company," says one debt investor. "On top of that he has the option in three years to keep the stock or hand it over to bondholders."
While a 12 per cent stake does not guarantee Mr Agarwal a seat on the Anglo board, it would put him in a powerful position should Anglo decide to sell South African assets. Anglo declined to comment on Mr Agarwal's investment.
"It does appear that Volcan is positioning itself to be in a front-line seat if any break-up of Anglo American were to happen," says Citi analyst Heath Jansen.
After returning to profitability in 2016, Anglo, which celebrates the 100th anniversary of its founding in South Africa this year, has pulled back from a radical shrink-to-survive strategy.
Anglo's chief executive Mark Cutifani says the company no longer needs to make disposals to cut debts and can hang on to assets previously deemed non-core such as its large iron ore and coal mines in South Africa.
But he has been careful not to rule out a deal that would see Anglo sell these assets or spin them off into a new vehicle listed in Johannesburg. Such a move would please many shareholders, who want the company to reduce its exposure to the South Africa because of political and regulatory uncertainty and strict capital controls that prevent cash from leaving the country.
"If someone has a view on how they would like to see something consolidated in South Africa, we are open to the conversation, but I would have to be able to demonstrate to all of our shareholders that it created value," he said after Anglo announced annual results in February.