By Michael Calia 

Reynolds American Inc. agreed to acquire Lorillard Inc. in a cash-and-stock transaction currently valued at $68.88 per Lorillard share, or a total of $27.4 billion.

The deal combines Reynolds' Camel and Pall Mall cigarettes with Lorillard's popular Newport menthol brand to create a more powerful No. 2 to U.S. industry leader Altria Inc., maker of Marlboro.

Reynolds and Lorillard have a combined stock-market capitalization of more than $50 billion.

The potential tie-up faces significant risks, including tough antitrust scrutiny. The U.S. Food and Drug Administration is also weighing a possible crackdown on menthol cigarettes, which fuel more than 80% of Lorillard's sales, after the agency banned all other cigarette flavors in 2009.

A deal would give Reynolds a jump on Altria in electronic cigarettes, the small but fast-growing alternative to traditional smokes. Both companies had been slow to enter that market, only beginning to roll out their brands nationally this summer. As part of a merger, Reynolds would get Lorillard's Blu e-cigarette brand, which has more than a 40% market share in U.S. convenience stores.

The potential combination comes as tobacco majors try to increase scale and cut costs amid a yearslong decline in U.S. cigarette consumption, including an estimated 4% contraction last year, even as profits remain robust. Two rare pockets of growth in the $100 billion U.S. tobacco market are e-cigarettes and menthol cigarettes. Lorillard is the market leader in both.

Write to Michael Calia at michael.calia@wsj.com

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