The government just sold a £750 million chunk of Royal Mail -- here's why

Culture Secretary, Sajid Javid, speaks to the media during a visit with New Zealand Prime Minister John Key to the Imperial War Museum on January 19, 2015 in London, England. The visit to the museum highlighted an historic meeting to ask descendants of those who fought in the Gallipoli campaign in 1915 to come forward and play a role in the commemoration on 25 April at the Cenotaph, Whitehall to mark the 100th anniversary.Carl Court/Getty ImagesBusiness secretary Sajid Javid is in charge of the sale.

The government sold half its shareholding in Royal Mail overnight and says it plans to sell off the rest soon.

The Department for Business, Innovation and Skills overnight found buyers for around 150 million shares, equivalent to 15% of Royal Mail. The sale will raise £750 million ($US1.16 billion) for the Treasury.

The sell-off is all to do with Chancellor George Osborne’s ambitions to balance the government’s books. During the election campaign the Tory party promised to run at a surplus — i.e. not spending as much as they collect in taxes — by 2017-18, a target many people see as unrealistic. Osborne has had a spending deficit since he took office in 2010.

The government is now in the midst of a massive public sector sell-off as Osborne looks for extra cash to meet this promise. The government is already speeding up the sale of its stakes in Royal Bank of Scotland and Lloyds, and has plans to raise a total of £23 billion ($US35.6 billion) through sell-offs.

Royal Mail shares were sold at 500p ($US7.74) each, a discount to yesterday’s closing price of 516.5p ($US8) but well above the 330p ($US5.11) level shares were offered at in Royal Mail’s stock market listing two years ago. The price of the float was criticised at the time as undervaluing Royal Mail, which operates a universal postal system across the UK.

Business Secretary Sajid Javid said in a statement: “This sale has raised £750 million and represents good value for taxpayers. That money can be used to reduce public debt, which is how we will deliver lasting economic security for working people.”

The government said it plans to sell off a further 14% stake in Royal Mail and will gift its final 1% of shares to Royal Mail employees. 10% 0f shares were given to employees when the postal operator was floated in 2013.

Javid said: “Royal Mail has demonstrated that it can thrive in the private sector. It now has the ability to access the funds it needs to ensure that it has a sustainable future and can adapt to the changes in the postal market.”

Despite the Business Secretary’s claim Royal Mail is thriving, the company is having a tough time, repeatedly warning of competition from rivals like Amazon and Yodel.

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