Brewers Unite to Go After U.S. Market : Merger: Canada’s Labatt and Mexico’s FEMSA Cerveza will combine American operations in a $510-million deal.

Two prominent brewers, based in Canada and Mexico, said Wednesday they have agreed to merge their U.S. units and market each other’s brands, joining forces to compete more effectively under free trade rules in the vast North American beer market.

According to the deal, John Labatt Ltd., Canada’s second-largest beer company, will also acquire for $510 million a 22% stake in FEMSA Cerveza, Mexico’s largest brewer.

The agreement, which is seen as strengthening the Mexican and Canadian competitors of the U.S.-based giants, includes a three-year option for John Labatt to buy another 8% of FEMSA Cerveza.

The Mexican firm, which holds 48% of the Mexican beer market, produces Tecate, Dos Equis, Superior and Carta Blanca brands.

Labatt, which has a 44% market share in Canada, makes Canada’s best-selling beer, Labatt Blue, Labatt Ice and Labatt Genuine Draft. It also brews Budweiser and Carlsberg brands under license in Canada.

Labatt and FEMSA intend to distribute each other’s brands in their own countries and will merge their U.S. operations into a specialty company to expand in the fast-growing and profitable U.S. market for imports, “micro brews,” super-premium beers and domestic specialties.

The deal is expected to be completed by late September.

Because of the U.S. brewers’ marketing power and low prices, Mexican and Canadian beers were among the products feared to be at most risk under the North American Free Trade Agreement, which gradually reduces tariffs on products exported within the continent.

U.S. brewers in the last year have formed strategic alliances with Mexican and Canadian firms, but the FEMSA-Labatt agreement would be the first between Mexican and Canadian companies.

Last year, FEMSA rival Modelo Group, which makes Corona beer, sold a 17.7% interest in the company to Anheuser Busch for $477 million. Miller Brewing Co. signed a $273-million marketing agreement with Canada’s Moulson Breweries. Miller’s parent, Phillip Morris Co., also owns 7.9% of FEMSA, the corporate parent of FEMSA Cerveza.

By combining forces, Labatt President George Taylor said, Labatt and FEMSA “will create a powerful vehicle for maximum penetration of North American markets.”

There is “an enormous cultural compatibility between Canadian and Mexican companies,” said Violy McCausland of James D. Wolfensohn, the New York investment banker that advised Labatt. “Both are more informal and less corporate.”

The companies are of similar size: FEMSA Cerveza had $1.3 billion in sales in its most recent fiscal year; Labatt had sales of $1.6 billion.

The joint venture exemplifies the growing mutual interest between Mexican and Canadian companies. Earlier this year, the Canadian Embassy in Mexico sponsored that country’s largest foreign trade show, with 426 companies represented, and plans to establish Canada’s first foreign business center in the Mexican capital.

The deal also is another step in the restructuring of FEMSA. As one of Mexico’s largest food conglomerates, it has been forming alliances with foreign companies in order to gain a more competitive position and reduce debt.

Last year, FEMSA sold a 30% stake in its Coca-Cola subsidiary to the Coca-Cola Co. for $30 million, then raised another $177.4 million in an offering of 19% of the subsidiary’s stock on U.S., Mexican and European markets.

The company also has been considering a stock offering in the brewery subsidiary.