The acquisition would bring under one company many of the world's best-known beer brands -- Corona, Modelo and Pacifico would join AB InBev's Budweiser, Beck's and Stella Artois, among others.
The combined company would have annual sales of $47 billion, and employ 150,000 workers in 24 countries.
AB InBev, based in Leuven, Belgium, said in a statement it has agreed with Modelo's management to pay $9.15 per share for the company, a 30 percent premium to the Mexican company's share price just before news of a possible deal came out on June 22.
The companies said the agreement was a "natural step," in light of AB InBev's current stake in Modelo.
"Grupo Modelo has been one of our most important partners for more than 20 years and we are very pleased to evolve our long and successful relationship into this combination," said AB InBev CEO Carlos Brito. "There is tremendous opportunity from combining two leading brand portfolios and further expanding Grupo Modelo's brands worldwide through AB InBev's extensive global distribution network."
Analysts said AB InBev appears to have paid highly for Modelo, but the deal makes strategic sense.
"This is likely to lead to higher margins for Modelo," said SNS Securities analyst Richard Withagen in a note. He said AB InBev will move rapidly to introduce more of its brands into the Mexican market.
"As a result, competition in the Mexican market is likely to remain fierce going forward."
Modelo has a share of around 56 percent of the Mexican beer market, while rival Dutch brewer Heineken NV controls around 41 percent, with brands such as Dos Equis and Tecate.
Shares in AB InBev SA rose 3.9 percent to close at $76.42 in Brussels, while shares in Grupo Modelo, SAB de CV, were up 0.6 percent in Mexico City.
AB InBev said it expects the companies will save $600 million annually by combining operations. Regulators around the world, but most importantly in Mexico and the U.S. must approve the deal. AB InBev said it expects the deal to close during the first quarter of 2013.
In a related deal, Modelo agreed to sell its 50 percent stake in distributor Crown Imports LLC to its partner, winemaker Constellation Brands Inc. of New York, for $1.85 billion.
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