Hoping to combat a decades-long slump in smoking, two of the biggest American tobacco companies said on Friday that they were in talks to merge and create a $56 billion cigarette colossus.
A deal between the second-biggest tobacco company in the United States, Reynolds American, and the No. 3, Lorillard, would unite the makers of the Camel and Newport brands and reshape the industry by creating a more formidable rival to the Altria Group, home of Marlboro.
Perhaps more significant, it would give the combined company a leading position in two of the fastest-growing products in a challenged industry: e-cigarettes and menthols.
But a merger, which could be announced as soon as next week, faces a number of significant obstacles.
Antitrust regulators in Washington are certain to scrutinize a deal that would effectively leave cigarette sales — and pricing — in the hands of a duopoly.
A combined Lorillard-Reynolds would control 42 percent of the tobacco market in the United States, according to Credit Suisse research, while Altria has nearly half of the market. And public health advocates have already raised concerns, worried that a merger would increase the influence of cigarette brands that have marketed to children.
Still, a takeover of Lorillard by Reynolds would represent the industry’s boldest response yet to a declining, if still profitable, market. A general drop in smoking rates and aggressive public health campaigns aimed at curbing smoking have cut into sales in the United States.
About 42 million people in the United States, or nearly 18 percent of the adult population, smoke cigarettes, according to the Centers for Disease Control and Prevention. That compares with about 21 percent of the adult population nearly a decade ago and 43 percent of the adult population in 1965, according to the C.D.C.
What remains of the traditional cigarette industry is dominated by Altria, whose Philip Morris arm sells one out of every two cigarettes in the United States.
Opportunity has beckoned in the new business of e-cigarettes. A deal by Reynolds to buy the leading purveyor of e-cigarettes could spur other mergers within the industry as manufacturers jockey for position.
“This transaction in our view will be very positive for the global tobacco industry and could be just the beginning of future transactions with e-cigs/vapor being the underlying catalyst,” Wells Fargo analysts wrote in a note.
At the same time, Reynolds has coveted Lorillard’s strong share of the fast-growing market for menthol cigarettes, which have proved more popular among younger smokers than traditional cigarettes. Lorillard’s Newport brand dominates that business and represents roughly 12 percent of the overall cigarette market.
Under the proposed terms of the deal, Reynolds American would buy Lorillard. It would then sell several billion dollars’ worth of brands and other assets to the Imperial Tobacco Group, the British company that makes Gauloises cigarettes and Montecristo mini-cigars, lifting Imperial to the No. 3 position in the United States.
British American Tobacco, which owns 42 percent of Reynolds American, would invest several billion dollars to maintain the same level of ownership in the combined company and help finance the transaction.
Shares of Reynolds fell 0.8 percent, to $61.75, on Friday, while those of Lorillard surged 4.6 percent to $66.01. Altria shares rose 1.1 percent to $43.43.
A Reynolds and Lorillard deal would combine two of the oldest names in the American cigarette industry. Lorillard traces its corporate ancestry back to 1760 and remains the oldest continuously operating tobacco company in the United States.
And Reynolds was formed from the merger of R. J. Reynolds Tobacco and Brown & Williamson a decade ago.
Talks have been going on for more than a year, with different deal structures contemplated, people briefed on the matter said. The presence of four companies and their particular demands complicated matters. Talks paused about two months ago as the difficulties of negotiating a four-way transaction took their toll.
Still, the companies persisted. The return of Susan M. Cameron as Reynolds’s chief executive helped smooth the process. She had led the company following the merger of Brown & Williamson and R. J. Reynolds in 2004, before retiring in 2011.
While none of the four companies disclosed financial terms for a transaction, Lorillard has a total enterprise value of $24.6 billion, according to Standard & Poor’s Capital IQ.
Given the influence on the market that a combined Lorillard-Reynolds could exert, the companies have long planned to sell some assets to win approval from regulators.
Bringing in Imperial is meant to assuage those concerns. Currently the fourth-biggest player in the American tobacco market with a single-digit percentage of market share, the British company would become a more robust competitor through such a deal.
Antitrust regulators will not be the only source of potential opposition. Public health advocates pointed to what they said was a history of traditional brands like Camel and Newport and e-cigarette brands like Blu marketing to children.
“Regulators beware,” Matthew Myers, the president of the Campaign for Tobacco-Free Kids, said in an interview. “The problem isn’t just antitrust. It’s the increased power of these companies to market to kids.”
While Reynolds describes the United States in regulatory filings as a “mature market” that has declined since 1981, Imperial still sees it as one of the world’s biggest and most profitable markets.
Instead, Reynolds sees opportunity in e-cigarettes, which already have about $2.5 billion in annual sales. Though that is a tiny fraction of the overall tobacco market, e-cigarettes sales are expected to grow quickly in the coming years.
Lorillard is the early leader in the market, having bought Blu eCigs for $135 million two years ago. It spent about $40 million marketing Blu e-cigarettes last year, driving sales up to more than $50 million per quarter and gaining the biggest share of sales at gas stations and convenience stores.
In October, Lorillard purchased Skycig, a British e-cigarette maker, and introduced the Blu brand to the British market.
A Reynolds subsidiary, R. J. Reynolds Vapor, began selling its e-cigarettes last month. Reynolds showed off its device, called Vuse, at the Consumer Electronics Show in Las Vegas and made it the official e-cigarette sponsor of the South by Southwest festival in Austin, Tex.
Altria is also getting into the e-cigarette market with its own subsidiary, NuMark.
In the first quarter, Lorillard, based in Greensboro, N.C., had net sales of $57 million from its e-cigarette business; that accounted for about 45 percent of all such sales in the United States. Lorillard had net sales of $1.59 billion in the first quarter and net sales of $6.95 billion in 2013.
David Gelles contributed reporting.