A FEW TOO MANY

John Sleeman just couldn't resist.

It was early 2003 and the public had declared war on carbohydrates. Dr. Atkins' pager was buzzing non-stop. Bacon and steak were in. Bread and beer were out.

Sleeman Breweries Ltd., a company founded on a handcrafted ale made from a nineteenth-century recipe, decided to act fast. It rushed "Sleeman Clear" into production, becoming the first Canadian brewer to market with a low-carb beer.

"Did I think in 1988 when I started the company that we'd have a low-carb beer? Absolutely not," Mr. Sleeman said this week.

"Would I have been smart to sit here and do nothing about a 24-month craze in the marketplace and watch other people take market share? That would be stupid too."

This was not the first time Sleeman Breweries veered away from its roots as a premium craft beer maker, nor would it be the last.

John Sleeman will be spending this long weekend -- one of the most important of the year in the industry -- thinking about selling the company that bears his family name. Declining volumes, a 56-per-cent drop in profit last year and pressures from Bay Street have proven too much. The company has asked its investment bankers to find a buyer.

How did it come to this? The Sleeman tale is filled with unbridled ambition, an insatiable thirst for acquisitions and a lack of focus. At times, the company grew too quickly, trying to swallow more than it could handle. Some of the breweries it bought were inefficient, and Sleeman has been slow to cut costs. Even Mr. Sleeman admits there are too many brands, and he has been unwilling to cull poor performers. All the while, the cachet of its core product -- premium Sleeman beer -- has been put at risk. Now in a world where discount and import beers are kings, the mid-size premium brewer is struggling to survive.

But for Mr. Sleeman, crunching the numbers and staying lean has never had much appeal. "I believe in and get excited by entrepreneurial ideas and growth," the 53-year-old said. "The idea of sitting back being a caretaker is not for me."

It wasn't always so. Sleeman's bold entrance and subsequent success in the beer game is the stuff of legend. Armed with his grandfather's recipe for Sleeman Cream Ale, he leveraged family heritage and a nifty clear beer bottle into an unparalleled success story in modern-day Canadian beer making. Mr. Sleeman's great-great-grandfather, also named John, began brewing beer in Ontario in 1834. But Mr. Sleeman didn't find out about it until he was in his 20s.

He was adopted and raised in an Ottawa suburb after spending the first year of his life in a foster home. After dropping out of high school, he got married and moved to England. But he was drawn back to Canada where he ended up owning a bar and starting a successful beer import business. One day an aunt showed him his ancestor's beer recipe. Not long after, he turned his sights to Guelph, Ont., and the dormant Sleeman family business of beer making.

Set to begin production in 1988, Sleeman almost didn't get off the ground. He found backing from U.S. beer maker Stroh Brewing Co. for much of the $3-million needed to get up and running. He added about half a million of his own money, but with beer fermenting in the tanks, Canadian bankers pulled their financing. Mr. Sleeman managed to broker a last-minute deal with a bank in Detroit.

The first few years were extremely lean. The company was in deep debt to nearly all of its suppliers. Yet Sleeman Cream Ale won over Ontario beer drinkers. The clear bottle and cool factor of a fancy heritage brew helped Sleeman turn its first profit in 1991. From $750,000 that year, Sleeman saw profit grow to $14.4-million by 2004 on revenue of $211-million.

Sleeman's success was due in part to fortuitous timing. For decades, Canadians had consumed products brewed almost exclusively by three companies, Molson, Labatt and Carling O'Keefe. Mainstream beer was the only beer, and the big brewers held a virtual lock on the industry.

In the 1980s, however, microbreweries started making inroads. They promised consumers a taste beyond the generic, with beer brewed in small batches using top-quality ingredients. The stuff also cost more than regular beer, meaning if production expenses were reasonable, premium could be a very profitable endeavour.

Frank Heaps, was in the vanguard -- as one of the founders of Upper Canada Brewing Co. Ltd., which launched in 1984. He remembers persuading the industry to try craft beer wasn't easy.

"You would walk into a bar and say 'Boy do I have a great microbeer for you,' " he said.

"They'd look around to see where you'd parked the spaceship."

By the time Mr. Heaps walked away from the business, Upper Canada was brewing 75,000 hectolitres of beer a year. (A hectolitre is 100 litres.) Mr. Sleeman saw opportunity in the Upper Canada brands, but his vision for the asset never really worked out.

Sleeman bought the company in early 1998 for $28-million. Mr. Sleeman concedes it did not go as well as he had hoped.

"Where we dropped the ball, quite frankly, was integrating the employees and continuing to put marketing and sales focus behind the brands," Mr. Sleeman said.

"It was our first acquisition. We were inexperienced and we could have done a better job."

Sleeman had to close the company's brewery in Toronto and found that many of the brands were competing directly with its own namesake products. Upper Canada is now a minor part of the crowded Sleeman portfolio, which includes some 40 labels in Ontario alone.

Mr. Heaps, 65, is now an investor in another company, Steam Whistle Brewing of Toronto. The premium beer maker is run by his son Cam, and a group of former Upper Canada staffers. It sells just one product, a pilsner that it never puts on sale.

"Price conveys a quality message," he said.

Mr. Sleeman wasn't deterred and he kept on buying regional breweries. But in many cases, he failed to derive substantial synergies or cost savings.

A reverse takeover in 1996 of Vancouver-based Allied Strategies Inc. gave Sleeman a public listing and a merger with Okanagan Spring, the largest craft brewer in British Columbia.

"At the time, I was convinced by Bay Street brokerage firms that being public was a great way to raise capital," Mr. Sleeman said.

Ironically, Sleeman didn't use much of its stock to buy other brewers. The majority of acquisitions were funded with debt. Mr. Sleeman said he was mindful of diluting shareholdings, including his own. (His current stake is slightly less than 5 per cent, down from an original 20 per cent. Half of that went to his first wife in a divorce settlement.) In 2000, Sleeman bought Maritime Beer Co., located in Dartmouth, N.S. The deal added a few brands, 80,000 hectolitres of capacity and a physical presence in the Atlantic Canada market.

Sleeman had planned to become a major presence in value-priced beer in the region. But the strategy has so far proven elusive.

Unibroue Inc., Quebec's largest craft brewer, whose premium, high-alcohol-content brands include Maudite (Damned), Eau Bénite (Holy Water) and La Fin du Monde (End of the World), was purchased in 2004 for $31-million.

The Quebec labels are marquee super-premium-priced brands, but the facility is not particularly efficient. The heavy-alcohol beer has much longer fermenting times than traditional brews. Having an infrastructure spread so thin across the country has cost Sleeman plenty in overhead. Sleeman has recently cut a shift at the Quebec plant and laid off workers, but the deal has contributed to the company's rising sales, expenses and marketing costs, which increased by more than $5-million in 2005 from the year before and by $4-million in the first quarter alone this year compared to last.

"I think he overpaid for all of them to tell you the truth," said Michael Palmer, a long-time beer industry analyst and president of Veritas Investment Research in Toronto.

Mr. Sleeman disagrees with the analyst's notion of worth.

"If you're talking to some guy on Bay Street with a calculator . . . I probably overpaid for stuff," he said.

"If you look at buying brand loyalty, if you look at buying facilities, if you look at distribution systems, I don't think we overpaid."

Mr. Sleeman might have remained a little brewer in Guelph, Ont., carrying on a family tradition of making good beer for a select few, but he couldn't.

"I can't live that way. I'm not the kind of person who can just sit there and milk things and put money in the bank," he said. Last year Sleeman and its board rejected the idea of becoming an income trust, a vehicle originally designed for companies with mature but steady cash flows.

Doug Berchtold, who spent 12 years at Sleeman as chief financial officer and later as company president, said growth is in Mr. Sleeman's DNA.

"John has very bold ideas and certainly he wanted to grow very quickly," said Mr. Berchtold who is now the president of rival Brick Brewing Co. Ltd.

Sleeman's boldest move may have been paying almost $40-million in cash to Stroh Brewing Co. for its portfolio of discount U.S. beer brands in 1999. Some observers point to the purchase as a key diversion from Sleeman's strategy of selling premium beer.

"He would buy companies just for size and brands," said an analyst who is prohibited from being identified in the press.

"Things just caught up with them."

Mr. Sleeman said the deal was key to filling capacity and wringing efficiencies out of the plant in Guelph. As the market for discount beer has increased, cheap beer now accounts for over half of Sleeman's volumes.

"At least we're there," Mr. Sleeman said. "Buying the Stroh business doubled our volumes, made our plants more efficient and helped reduce our cost of goods sold. It was a great strategic decision."

And so now, Mr. Sleeman just wants more time. He believes the impatient demands of money managers and financial analysts have forced his hand.

"I have tried to march to the beat of my own drummer, which is premium beer, family heritage," Mr. Sleeman said. "Had we not become a public company in 1996, there would have been significantly different pressures . . . We could have said 'To hell with you we're going to make Sleeman Cream Ale and if you don't like it, too bad.' " But he didn't. John Sleeman decided to get big.

"He promised growth and just kept adding brands," Veritas's Mr. Palmer said. "He kept buying things and he lost his focus."

A growing stable of brands

SleemanThe recipe, which is said to contain Irish moss, was formulated in 1898 by George Sleeman. An aunt gave John Sleeman his grandfather's notebook in 1984. It contained the original recipe used for the first Sleeman Cream Ale brewed in 1988, which was sold in a clear bottle. Last year, Sleeman began a program of limited-time offers that cut the price of Cream Ale and other premium brands in Ontario and Quebec, from time to time. Over the years, the Sleeman brand has grown to include nine separate offerings including Honey Brown, Steam and Original Draft.

Okanagan: Okanagan's portfolio of premium brands was combined with Sleeman in 1996 as part of a reverse takeover. Labels include Extra Special Pale Ale, Premium Lager and Bavarian Lager. The company's Vernon, B.C., facility makes the products that adhere to the Bavarian Purity Law of 1516. The deal helped Sleeman establish a national distribution system and begin selling its own beer in Western Canada. Today, Sleeman brands have achieved roughly 10 per cent of the market share in B.C.

Upper Canada Sleeman acquired Upper Canada's stable of brands in 1998 for $28-million. Labels include Dark, Lager and Rebellion. Once a major force in the Ontario premium beer market, Upper Canada's sales have skidded, according to Sleeman, because of a lack of advertising and sales support from Sleeman.

ShafteburySleeman scooped up another B.C. brewer in 1999, buying Shaftebury Brewing of Delta for an undisclosed price. The acquisition added 30,000 hectolitres of capacity and brands including Shaftebury Cream Ale, Shaftebury Honey Pale Ale. The company recently launched a beer called Four Twenty Brilliant Lager.

Stroh: Sleeman purchased the Stroh Brewing Co. portfolio of discount beers in 1999 for $39-million. With brands including Old Milwaukee, Pabst Blue Ribbon, the deal helped Sleeman double the company's volumes but in a category with lower margins than premium beer.

Unibroue: Sleeman bought the super premium beer maker based in Chambly, Que., in the spring of 2004. The brands, including Maudite and La Fin du Monde, were once sold exclusively in Quebec but have proven strong sellers in English Canada and internationally. Sleeman has struggled to improve the efficiencies of the plant.

Grolsch: Sleeman purchased the right to distributed the Netherlands-based Grolsch brand in Canada for more than $8-million in 2002. Over the years, Sleeman has brewed and/or distributed a series of import brands in Canada, including Guinness from Ireland, Sapporo from Japan and Sam Adams from the U.S. In 2006, Sleeman struck an agreement with FEMSA to sell Sol, Dos Equis and other brands in Canada.

Maritime: In September, 2000, Sleeman acquired a small bankrupt brewery in Dartmouth, N.S. The facility brewed brands including Atlantic Storm, Black Pearl and Frosted Frog. With 80,000 hectolitres of capacity, the facility had annual sales of $2-million when Sleeman bought the assets. Sleeman said the deal added a much-needed increase in production capability and a distribution centre for the region. The brewery also makes the Maclays brand.