By Michael Calia 

Reynolds American Inc. agreed to acquire Lorillard Inc. in a cash-and-stock deal worth about $25 billion, the companies said Tuesday.

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 expects to have more than $11 billion in revenue and about $5 billion in operating income after the deal.

Additionally, Reynolds American said it reached a deal to sell the Kool, Salem, Winston, Maverick and Blu eCigs brands and other assets to Imperial Tobacco Group PLC for $7.1 billion in cash. Reynolds said it expects to receive $4.4 billion in proceeds after taxes. Selling the brands is aimed at easing the antitrust scrutiny that the deal may face.

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.

Under the terms, Lorillard shareholders will receive $50.50 in cash and 0.29 Reynolds shares in exchange for each Lorillard share, a value of $68.88 per share. Including the assumption of debt, the deal is valued at $27.4 billion, the companies said.

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.

Reynolds and Lorillard have a combined stock-market capitalization of more than $50 billion. Altria has roughly 50% of the U.S. cigarette market. Reynolds and Lorillard have roughly 25% and 15% U.S. market shares, respectively, before any divestitures.

Lorillard's crown jewel is Newport, whose share of the U.S. cigarette market rose from 9.7% in 2008 to 12.2% last year, trailing only Marlboro, according to Euromonitor. The leading menthol brand also skews younger than most brands, giving Lorillard a 22.5% share of consumers aged 18 to 25, RBC Capital Markets recently estimated.

Imperial Tobacco, which has around a 3% share of U.S. cigarette sales, largely behind its USA Gold discount brand, is being enlisted to allay antitrust concerns and help finance the deal.

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

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