Reynolds American, the maker of Pall Mall and and Camel cigarettes, will pay a mixture of cash and stock that will value Lorillard, maker of Newport cigarettes, at $68.88 a share.
Lorillard shareholders will get $50.50 in cash and 0.29 of Reynolds share for every Lorillard share they own.
The deal also means that British American Tobacco will retain its 42 percent stake in Reynolds and Imperial Tobacco of U.K. will acquire the Kool and blu e-cigarette brands for $7.1 billion.
The deal will create a stronger No. 2 in the American tobacco industry. Altria, the maker of Marlboro, is the market leader with a 50 percent market share; Reynolds and Lorillard have roughly 25 percent and 15 percent of the market, respectively.
Reynolds expects the acquisition to bring in $11 billion in revenues and $5 billion in operating income.
The deal comes as the American tobacco market saw a four percent contraction last year, with dipping sales and profits. The only segment seeing any growth is the $100 billion e-cigarette and menthol cigarette market, of which Lorillard is the leader.
"It's transformative because it creates a duopoly in the U.S. and will help them to manage the volume declines," Philip Gorham, an analyst at Morningstar Inc. in Amsterdam, said before the transaction was announced. "They are still getting younger smokers in developed markets, but not at the rate as the old ones are dying off."
The deal is subject to regulatory risks, including tough anti-trust scrutiny. Also, the Food and Drug Administration has been mulling a crackdown on menthol cigarettes, which account for 80 percent of Lorillard's sales, after the agency banned all cigarette flavors in 2009.