Reynolds American agreed Tuesday to acquire smaller competitor Lorillard for $27.4 billion, one of the biggest transactions in recent years in the U.S. tobacco industry.

The deal brings together the United States' No. 2 and No. 3 tobacco producers and links their operations in the growing e-cigarette and menthol cigarette markets, posing a challenge to Altria Group, the top U.S. tobacco producer.

"Reynolds American 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," Reynolds CEO Susan M. Cameron said in a statement.

Cameron will remain at the head of the combined companies, while Lorillard Chairman and CEO Murray Kessler will become a board member once the transaction is finalized.

Under the deal, Reynolds will buy Lorillard's shares, valued at $68.88 each, with cash and its own stock and also assume that company's debt.

Lorillard's shareholders will receive $50.50 in cash and 0.29 of Reynolds share for each stock they own.

As a result of the "definitive" deal, the enlarged Reynolds will boost its annual revenue to $11 billion and have key positions in the traditional cigarette, chewing tobacco and e-cigarette markets.

In a related transaction to divest non-strategic assets and ease anti-trust concerns, Reynolds said it agreed to sell its traditional KOOL, Salem and Winston brands, as well as Lorillard's top-selling Blu e-cigarette brand, to Britain's Imperial Tobacco Group for $7.1 billion.

The acquisition of Lorillard will give Reynolds a nearly 42 percent share of the U.S. tobacco market, analysts say. EFE