The two companies have been negotiating the Miller deal for several months. SAB has also been named as a possible buyer of Australian, Latin American and European brewers in recent months, including the U.K.'s biggest brewer Scottish & Newcastle (SCTN)

"The transaction represents a new chapter in our development, taking SAB Miller to the number two position globally, and positioning it to be a major participant in the ongoing consolidation of the global beer industry," Graham Mackay, chief executive of South African Breweries, said in a statement.

Philip Morris CEO Louis Camilleri said the transaction is "strategically compelling and is in the best interest of our shareholders. ... The enlarged group will have the ambition, as well as the financial and managerial capability, to become the world's leading brewer."

Shares of Philip Morris (MO) gained 57 cents, or 1 percent, to close at $56.98 after touching an intraday high of $56.98.

SAB (SBWRY) (SAB) slid 3.3 percent in London as investors anticipated an equity issue placing. SAB, which will be renamed SAB Miller once the deal closes, is expected to issue up to 170 million shares, according to J.P.Morgan analysts.

Under the terms of the deal, Philip Morris would own 36 percent of SAB Miller, worth $3.6 billion. Additionally, SAB would assume $2 billion of Philip Morris debt.

Going after Coors

The deal, if approved, would give SAB powerful entree to the U.S. market, the largest in the world, competing with No. 1 Anheuser Busch (BUD) Miller is running a distant second place in the U.S. market to A-B, with about a 20 percent market share vs. 49 percent share for the Budweiser parent.

Miller has lost market share in recent years to A-B and Adolph Coors Co. (RKY) , but marketing is likely to see a renewed focus with SAB at the helm, J.P. Morgan analyst Nigel Davies told clients Thursday.

"Based on SAB's success with the Pilsner Urquell brand, it has the track record to accelerate the first signs of a turnaround in fortunes that have recently been evidenced at Miller," he said.

Volume growth in the U.S. market has been sluggish, averaging 0.6 percent a year over the last eight years, J.P. Morgan said. Moreover, beer has steadily declined to 13.9 percent of beverage consumption per capita from 15.3 percent over the same period. The volume growth rate, however, picked up in the late 1990s, rising to 1.2 percent year-over-year growth in 2000, the broker said.

MO buyback accelerated

Under the terms, Philip Morris cannot sell its shares in SAB Miller before June 30, 2005. It will receive a 25 percent voting interest in SAB Miller after the deal closes, expected in July once the companies have SAB shareholder and regulatory approval.

Seeking to address some concern in the market over a possible overhang in SAB shares after the deal, Philip Morris said in a statement that is intends "to be a long-term shareholder in SAB Miller."

The company is expecting to see net cash of $1.7 billion, which it said it plans to use to "accelerate" its own share buyback plan this year. The buyback is expected to reach $6 billion this year, according to Merrill Lynch research.

Philip Morris is the world's largest tobacco firm and owns 84 percent of Kraft Foods (KFT) It's in the process of changing its name to Altria Group.

Rating reaffirmed

Also Thursday, Standard & Poor's reaffirmed its "A" corporate credit rating and the "A-1" commercial credit for Philip Morris following news of the SAB deal.

"Although the U.S. tobacco industry continues to face substantial litigation challenges, Standard & Poor's believes that management's financial policies and strong cash-generating abilities support the ratings," said S&P credit analyst Nicole Delz Lynch.