Sleeman's Unibroue buy offers up Quebec market

With its deal this week to swallow Quebec's Unibroue Inc., Sleeman Breweries Ltd. is buying itself a decent growth platform in the country's second-largest beer market and -- in the bargain -- bolstering its position as Canada's third-biggest national brewer, albeit still way behind top dogs Molson Inc. and Labatt Brewing Co. Ltd.

Sleeman, based in Guelph, Ont., has been on a steady growth curve over the past few years, and investors have taken to the story it has to tell. The agreement to buy Chambly, Que.-based Unibroue, maker of Belgian-style superpremium quaffs with exotic names such as Fin du Monde (End of the World) and Maudite (Damned), provides Sleeman with the opportunity to expand in la belle province without having to build from scratch. It also gives it the ability to tap into Unibroue's superior distribution networks in the United States and Europe.

Sleeman's shares closed yesterday at $12.40 on the Toronto Stock Exchange, well above their 52-week low of $9.

News of the Unibroue acquisition has helped allay investor fears about where Sleeman was going to go for future capacity and revenue growth.

"This allows Sleeman to be poised to become the pre-eminent domestic premium brand supplier in Canada," said analyst David Hartley of First Associates Investments Inc. in Toronto.

"Sleeman is a small No. 3 player in Canada, but they're taking advantage of strong premium brand growth in Canada, both imports and domestic," he said.

As it grows by acquisitions and the licensing of brands, Sleeman itself is turning into an attractive takeover target, Mr. Hartley adds.

"Once the [Unibroue]acquisition is integrated and production is optimized, this company will become a lot more attractive to someone who wants to take them out, particularly an international player. It's a great platform for someone to leverage in Canada," he said.

Mr. Hartley isn't comfortable mentioning any names of likely candidates, but he believes it makes more sense for a foreigner with an established premium pedigree to be interested in Sleeman than domestic mass market giants Molson or Labatt.

Without ruling out a play by Molson or Labatt -- which is owned by Belgian giant Interbrew SA -- he sees more of a natural fit between Sleeman and a foreigner.

"There are some difficulties with that scenario [of a domestic company buying Sleeman]in terms of the consumer seeing Molson or Labatt as makers of mainstream products; that could damage the premium-ness of Sleeman's brands."

Whether or not Sleeman's destiny is an end game in which it becomes prey for a global brewer, Mr. Hartley believes the Unibroue acquisition is a significant move that will improve its premium brand positioning and its access to markets in Canada.

Sleeman now has sufficient capacity for the next five years, he wrote in a recent research note.

He has raised his earnings-per-share estimate for 2005 to $1.13 from $1.08 and bumped up his 12-month target price to $16 from $14.