Canada: Sleeman Breweries Ltd. attracting four bidders

At least four brewery companies are expected to make a bid for Guelph, Ont., based Sleeman Breweries Ltd., as the auction of the C$220-million beer maker enters its final stage, The Globe and Mail released July 31.

Molson Coors Brewing Co., Dutch brewer Royal Grolsch NV, Japan's Sapporo Breweries Ltd. and Labatt, owned by Belgium's InBev, could bid for Sleeman, the paper said, citing industry and investment banking sources. All are expected to make formal bids by a Sleeman-imposed deadline of the end of July 31, according to industry and investment banking sources.

Sleeman refused to confirm or deny the reports and wouldn't say when it hopes to announce a buyer.

Shares of Sleeman Breweries jumped nearly 15 per cent Monday after published reports. Sleeman shares gained C$1.95 to close at C$15.25 in trading on the Toronto Stock Exchange, for a total stock market value of more than C$255 million.

Sleeman, which holds 7 per cent of the Canadian beer market, announced a "strategic review" in May that could include the sale of the Guelph, Ontario-based company. Sources say the brewer hopes to announce a buyer by October.

Bids for Sleeman are expected to come in at more than CA$15 a share, according to industry sources, which would value the company at CA$250-million. Sleeman stock closed July 28 at CA$13.30, up 9 cents on the Toronto Stock Exchange. Since May, the stock has traded as high as CA$17.44 on bidding war speculation.

A source working with a potential buyer said investment bank BMO Nesbitt Burns Ltd., which is running the auction, does not expect to get offers from private equity funds, which had previously been seen as possible bidders. A spokesperson for Sleeman said its policy is not to comment on the strategic review.

The favourite in this race is seen as Molson Coors, if the company can satisfy competition regulators, according to analysts. Molson Coors and Labatt each have 41 per cent of the domestic market.

"Molson Coors is a logical buyer because it could bolster its brand portfolio with the underdeveloped Sleeman flagship brand," Blackmont Capital analyst David Hartley said in a report in late May.

He added the Colorado-based brewer would also want to block out rivals, as "Molson, with its weaker brand portfolio, is more vulnerable than Labatt to losing market share to new market participants."

Labatt is a unit of Belgium-based InBev SA and has established solid market share with several of its parent's premium beers, including Stella Artois and Beck's.

Grolsch, based in Holland, and Japan's Sapporo are interested in Sleeman because Canada's third-largest beer maker offers ready-made distribution and brewing facilities, along with super-premium brands, analysts say. But the pair may not have the stomach for a high-stakes bidding war, with Mr. Hartley pointing out that both foreign companies lack their rivals' cost-saving synergies when it comes to integrating Sleeman's operations, which are home to 700 employees.

British beer heavyweight SABMiller PLC is not bidding for Sleeman, sources confirmed. The company is focused on first resolving the distribution problem of its brands in Canada.

Miller is locked in a bitter legal dispute with Molson Coors over the way it markets brands such as Miller Genuine draft and Miller Lite sold in Canada. Miller alleges Molson Coors is ignoring Miller's labels in favour of its own beer, Coors Light.

Sleeman is known for selling its flagship beer in clear bottles. That distinctive glass is a central part of the company's branding strategy, and looms as a marketing problem for either Molson Coors or Labatt. The two brewers may be concerned with straying from the industry standard bottle they each currently use.

The agreement, which stipulates that both companies use the same brown bottle for beer produced and sold in Canada, saves Molson and Labatt $100-million each a year. Last year, Molson bought Ontario-based Creemore Springs Brewery Ltd., and had to replace the craft brewer's larger bottle.

Shares of Sleeman Breweries jumped nearly 14 per cent July 31 after published reports sparked speculation about a possible bidding war for Canada's third-largest beermaker, which put itself up for sale earlier this year.

Sleeman shares were up 14 per cent in afternoon trading, up $1.87 to $15.17 on the Toronto Stock Exchange for a total stock market value of more than $223 million (figures in CA$).

While speculation swirls around which company might be the winning suitor, Blackmont Capital analyst David Hartley suggested that independent brewer Moosehead could sneak in and merge with Sleeman, though Moosehead says it has no such plans.

"Currently, from a Moosehead standpoint there is no interest or desire to form any kind of merger with Sleeman at this time," said Steve Poirier, Moosehead's vice-president of sales and marketing. "The way their company is currently structured just wouldn't be a good fit with our company."

Earlier this year, Moosehead signed a $3.5-million deal with the New Brunswick government to help its expansion in the province. The loan doesn't have to be paid back if Moosehead invests $35 million in expansions by March 2008.

So far, Moosehead has said it plans to spend $22 million to install four giant fermenting tanks, a new boiler and grain-handling equipment.

"Moosehead is also a premium green-bottled brand in Canada, with some access to the U.S., which also has a strong relationship with McAuslan in Montreal and has the Carlsberg brand as a licensee brand. It might be a nice fit," Hartley said.

Such a merger would allow the companies to pool their resources and put more marketing weight behind a few chosen premium brands, Hartley said. Shareholders had expressed concerns with Sleeman's over-abundance of specialty brands during its annual meeting in May.

"Every week you're putting out a new brand, which is nuts," one shareholder told chairman and CEO John Sleeman.

The CEO suggested the company might reduce costs by selling some beer brands only in select regions.

Hartley said a foreign player could take the bidding process to $19 a share or more.

"Our sources are telling us that a drop-dead date has not necessarily been set for bids for the company and we believe that there is still ample time and opportunity for players to enter the fray," he said.

Sleeman, Canada's third-biggest brewer with seven per cent of the country's beer market, said in May it would begin a "strategic review" that could involve a sale.

At that time it reported a first-quarter loss of $813,000, from a year-ago profit. The loss included a $2-million restructuring charge that came from cutting 80 jobs last August.

Aside from its own brands, Sleeman distributes such imports as Guinness, Grolsch, Samuel Adams, Scottish & Newcastle and Sapporo Breweries products.

Canadian beer market: who sells what

Molson Coors: 42%

With its market-leading Coors Light and the flagship Molson Canadian brand, the Colorado-based company is still Canada's top brewer. Distribution agreements for Heineken and Corona make Molson a big player in the import category.

Labatt Brewing: 41.5%

Budweiser is the king of beers for Labatt and for much of Canada. While Labatt Blue sales have faltered in recent years, imports from parent InBev SA, such as Stella Artois and Beck's, have kept revenue consistent.

Sleeman Breweries: 7%

The Guelph, Ont.-based brewer has been on an acquisition binge for the past decade. The deals have added discount labels and regional brands to its core Sleeman line sold in distinctive clear glass bottles. The company has been hurt by surging sales of discount brands and the growing market for imports.

Moosehead, Big Rock, Lakeport, Brick Brewing plus regional and microbreweries: 9.5%

Moosehead is closing in on Sleeman to become the country's third-biggest brewer by volume. Lakeport and Brick are big players in the discount segment. Big Rock is strong in Alberta and the West. Regional and microbrews fight over what remains.

By the numbers

Number of Canadian breweries in 2005: 94;
2005 beer sales: CA$8-billion;
Beer sales increase from 2004 to 2005: 0.7%;
Per capita beer consumption for Canadians of legal drinking age: 88.22 litres;
Highest consumption per province or territory: Yukon, with 150.8 litres a person over age 15;
Lowest consumption per province or territory: Saskatchewan, with 73.1 litres a person over 15.

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