Reynolds American Inc. agreed to buy rival Lorillard Inc. for about $25 billion excluding debt, a deal that would leave the 400-year-old U.S. tobacco industry with two competitors controlling 90 percent of the market.

Reynolds, the producer of Camel and Pall Mall cigarettes, will pay a mixture of cash and stock valuing each Lorillard share at $68.88, according to a statement. British American Tobacco Plc will fund $4.7 billion of the transaction, letting it maintain a 42 percent stake in Reynolds. BAT’s U.K. rival Imperial Tobacco Group Plc, meanwhile, will acquire brands such as Kool and Blu e-cigarettes for $7.1 billion, potentially assuaging antitrust concerns.

After decades of anti-tobacco health campaigns, slumping demand has put pressure on the industry to consolidate. Acquiring Lorillard, the U.S. industry’s third-largest competitor, would help Reynolds cope with the slowdown and give it the Newport menthol line, which is popular in urban areas. Still, the deal faces challenges and investors signaled that they’re uncertain the transaction will close in its current form. Lorillard shares slid as much as 7.2 percent to $62.35 in New York trading, falling well below the purchase price.

“There’s a lot of risk,” said Owen Bennett, an analyst at Nomura Holdings Inc. in London. “There are a lot of factors involved.”

Including debt, the purchase is valued at $27.4 billion, according to the statement. The new company will have annual revenue of more than $11 billion and operating income of about $5 billion, making it a bigger competitor to U.S. market leader Altria Group Inc.

Reynolds shares also fell after the acquisition was announced, dropping as much as 4.1 percent to $60.61. Imperial Tobacco declined 1.6 percent to 2,696 pence in London, while BAT fell less than 1 percent to 3,568 pence.

After the transaction is closed, the combined company will account for almost 33 percent of the U.S. industry, according to Reynolds. Imperial will see its market share more than triple from 2.5 percent to 9.5 percent, the company said. Still, that leaves the U.S. with two competitors -- Reynolds and Altria -- selling nine out of every 10 cigarettes.

They’ll wrestle for customers in an industry where health concerns and smoking restrictions have eroded sales. Total U.S. cigarette shipments fell by a median of 2.9 percent in the first quarter among the nation’s top tobacco companies, according to data compiled by Bloomberg Industries.

The deal -- which followed months of on-again, off-again talks -- will have to pass antitrust hurdles. As part of the effort to overcome those challenges, Imperial will acquire well- known brands such as Salem, Winston and Maverick. Getting the Blu lineup also gives Imperial a foothold in the emerging market for e-cigarettes -- battery-powered devices that can deliver nicotine and other substances through vapor.

The U.K. company said separately that it will fund its portion of the transaction entirely through debt.

“The most surprising element is that Imperial is taking the e-cigarette business from Lorillard,” said Philip Gorham, an analyst at Morningstar Inc. in Amsterdam. “It was probably the sweetener that convinced them to buy what is essentially a selection of third-tier brands.”

Reynolds said it expects cost savings of about $800 million and for the deal to add to earnings in the first year. Susan Cameron will continue as chief executive officer of Reynolds after the acquisition, and the company will remain headquartered in Winston-Salem, North Carolina. Murray Kessler, chairman, president and CEO of Greensboro, North Carolina-based Lorillard, will join Reynolds’s board.

Reynolds and BAT also agreed to share next-generation tobacco technology, including heat-not-burn cigarettes and vapor products. Imperial will acquire Lorillard’s manufacturing and research facilities in Greensboro and about 2,900 employees, including a national sales force. Reynolds will keep its Vuse line of e-cigarettes.

Lorillard’s biggest product, Newport, will give Reynolds fresh ammunition against Altria, whose brands account for more than half of the U.S. retail cigarette industry. Altria’s Marlboro by itself has market share in the U.S. of about 44 percent, according to the company’s website.

Lazard served as lead financial adviser to Reynolds, which also consulted with JPMorgan Chase & Co. Centerview Partners and Barclays Plc advised Lorillard. Jones Day LP provided legal counsel toReynolds, while Simpson Thacher & Bartlett LLP served as Lorillard’s legal adviser.

Reynolds, Lorillard and London-based BAT have been in talks since last fall to reach an agreement that would satisfy all three parties, people familiar with the matter have said. They made a tentative deadline of July to reach a deal because of a standstill agreement by BAT not to raise its stake in Reynoldswithout the approval of Reynolds’s board until this month.

BAT’s agreement keeping it from increasing its stake in Reynolds dates back to the merger of R.J.Reynolds Tobacco Holdings Inc. with Brown & Williamson Tobacco. The Federal Trade Commission is likely to take a hard look at the latest proposed transaction, said David Balto, a Washington attorney and former policy director for the FTC who litigated BAT’s merger with Reynolds in 2004.

The FTC allowed that deal to go through because Brown & Williamson was losing market share and Lorillard was still around as a viable competitor, according to a brief released by the FTC. The market is more consolidated now, and this deal will face serious scrutiny, Balto said.

“The FTC will be very concerned about competition in this market,” he said in a phone interview. “The FTC will want to make sure some level of competition is restored.”

There is a chance that just selling off the minor brands to Imperial won’t be enough, he said.

“There is a difference between these brands being in the hands of a powerful company like Lorillard and being owned by an upstart like Imperial,” Balto said.

--With assistance from Selina Wang in New York and Cotten Timberlake in Washington.

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