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As the U.S. cigarette market dips, the nation's second-largest tobacco company Reynolds American announced Tuesday that it plans to buy the third-largest one Lorillard for about $27.4 billion, creating a rival for market leader and maker of Marlboros Altria Group.

Reynolds, maker of Camel and Pall Mall, will acquire Lorillard, maker of Newport, in a deal that is one of the largest ever in the tobacco industry and will likely face scrutiny from regulators.

To allay regulators' concern, the companies said they would sell some of their smaller brands -- Reynolds will sell Kool and Salem and Lorillard will sell its e-cigarette brand blu eCigs - to Imperial Tobacco for $7.1 billion, making Imperial the third U.S. largest tobacco company.

The news may surprise some industry analysts who said Reynolds was interested in Lorillard partly for its blu eCigs brand, which dominates the expanding market for electronic cigarettes at a time of contraction for conventional cigarettes.

Yet Reynolds' president and CEO Susan Cameron, in announcing the deal, made clear that the company plans to take on the e-cigarette market with its own new VUSE product, recently rolled out nationally. She said VUSE offers "superior technology."

On a conference call with investors Tuesday, Cameron said Reynolds is ramping up VUSE's production. "We're selling it very quickly."

Reynolds stock dipped 2% in pre-market trading Tuesday while Lorillard's shares fell more than 4%. Both companies' share closed slightly higher Monday.

The consolidation could boost the ability of Winston Salem, N.C.-based Reynolds to take on Alltria Group Inc., owner of Philip Morris USA, which alone commands 46% of the U.S. cigarette market, according to Euromonitor International. Reynolds currently has about 25% of the market and Lorillard 12%.

"This is a win-win," Cameron told investors. In the company's announcement, she said the Reynolds and Lorillard have "complementary core strengths and the addition of Newport to our operating companies' existing key brand portfolios – including flagship brands Camel, Pall Mall, Natural American Spirit and Grizzly – will enhance our ability to compete in the combustible cigarette and smokeless categories."

Cameron said the acquisition gives Reynolds "additional resources to invest in innovation, R&D and its operating companies' brands."

That worries public health advocates. "There's serious concern that a merged company with increased resources poses a real threat to increased tobacco marketing to America's kids," says Matthew Myers, president of the Campaign for Tobacco-Free Kids.

"This is a marriage of Joe Camel and Newport -- two brands that have played a major role in youth tobacco use," Myers said.

Michael Lavery, tobacco analyst at New York-based CLSA Americas, said the deal will enable Reynolds to consolidation production, sales and overhead. "There's real savings there," he said.

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