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The Commonwealth Bank of Australia share price could rise on plans to sell Colonial First State

There’s finally some good news for embattled shareholders of Commonwealth Bank of Australia (ASX: CBA) after Australia’s largest bank said it will float its investment management business Colonial First State Global Asset Management (CFSGAM) on the ASX.

This could help the bank generate some much needed support as companies that undertake divestments such as this have historically outperformed the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) benchmark.

The news comes at a bleak time for the banks and the sector as they face the Banking Royal Commission with their tails between their legs to answer allegations of unlawful and unconscionable conduct. Growing cyclical headwinds in the mortgage lending market are not helping either.

But investors may be willing to overlook these points for a while as they mull the proposed spin-off of CFSGAM through what is likely to be an in-specie distribution. This is where existing Commonwealth Bank shareholders get shares in the initial public offer that are proportional to their holdings in the bank.

Investors who continue to hold shares in both the parent and child companies following such spin-offs have seen good returns in most cases. BHP Billiton Limited’s (ASX: BHP) float of South32 Ltd (ASX: S32), National Australia Bank Ltd’s (ASX: NAB) divestment of CYBG PLC/IDR UNRESTR (ASX: CYB) and Orica Ltd’s (ASX: ORI) spin-off of DuluxGroup Limited (ASX: DLX) are just some examples.

However, it does seem that most of the outperformance comes from the child entity over the parent and I suspect this will be true for Commonwealth Bank, which is looking to complete this transaction by the end of this calendar year.

There is actually no real rush to buy Commonwealth Bank even on this piece of good news. Even if you bought CFSGAM on market after it is floated, you will still be able to capture a lot of the potential upside without having to deal with the earnings risk from holding a big bank stock.

It won’t surprise you that I am pretty bearish on the sector as I think a new round of profit downgrades may be on the cards.

The outlook for CFSGAM is better, even though Magellan Financial Group Ltd’s (ASX: MFG) recent poor results show it’s no walk through the park. On the upside, CFSGAM has scale, a good brand name and provides local investors with a way to gain exposure to international equities.

Other companies that are also planning a spin-off or are rumoured to include Wesfarmers Ltd (ASX: WES), which is preparing to cut its apron strings to Coles; and Lendlease Group (ASX: LLC), which could be considering a separate listing for its engineering business.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, CYBG Plc, National Australia Bank Limited, and South32 Ltd. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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