There have been unconfirmed reports about the possible merger, but on Friday the two companies acknowledged the talks. If the deal does go through it will create a tobacco behemoth that will compete with industry leader the Altria Group, makers of Marlboro. The deal also comes at a time when cigarette sales have dropped in the U.S. and the trend of using e-cigarettes continues to grow.
Neither company has divulged financial details related to the merger.
The merger will be welcomed by tobacco companies in the global market. Imperial Tobacco of Britain is considering buying assets from the two American tobacco firms. British American Tobacco owns 42 percent of Reynolds and has backed the deal since the start. Reynolds said that British American Tobacco will retain its 42 percent stake in the combined company.
"The discussions are consistent with RAI's strategy of considering a variety of options to enhance shareholder value," Reynolds said in a statement.
The merger will happen in an environment where smoking habits are changing and younger smokers are choosing e-cigarettes. The tobacco market, while declining, is still profitable with Reynolds posting $8.3 billion in sales.
According to the Centers for Disease Control and Prevention, 42 million people in the United States, or about 18.1 percent of the adult population, smoke cigarettes, down from the 20.9 percent that smoked 10 years ago and far less than the 42.9 percent of adults who smoked in 1965.
This prompted both American companies to invest in e-cigarettes, even though they account for a very small percentage of the market. Reynolds owns e-cigarette brand Vuse and Lorillard owns blu and Skycig.
2014: The Year in Music [PHOTOS]