The long-rumored deal between two of the biggest players on tobacco road finally came to fruition. Reynolds American, Inc. (NYSE:RAI) announced on Tuesday, July 15th, it was acquiring Lorillard Inc. (NYSE:LO) for more than $27 billion in a cash and stock deal, bringing together two of the country’s biggest tobacco companies to try and keep up with the competition in a cutthroat industry.

Reynolds American

Details of Reynolds American – Lorillard acquisition

According to the statement released today, Reynolds American, Inc. (NYSE:RAI) has agreed to pay a total of $68.88 for every Lorillard Inc. (NYSE:LO) share as well as assume debt as part of the deal.

The terms of the transaction call for Lorillard shareholders to receive $50.50 in cash and 0.29 Reynolds American shares for each Lorillard share, which works out to $68.88 per share. Given the $2.2 billion in assumed debt, the deal is valued at $27.4 billion. Reynolds said it anticipates $11 billion in revenue and around $5 billion in operating income for the combined firm.

Complex, multi-party deal

Two other tobacco companies are also a part of this complex transaction. The Imperial Tobacco Group PLC (ADR) (OTCMKTS:ITYBY) (LON:IMT) has agreed to purchase the Kool, Salem and Winston cigarettes and Blu e-cigarettes, as well as acquire a former Lorillard Inc. (NYSE:LO) manufacturing plant for about $7.1 billion, as apart of the deal. Analysts say shedding several brands should minimize the antitrust scrutiny from regulators regarding the deal.

Moreover, British American Tobacco PLC (ADR) (NYSEMKT:BTI) (LON:BATS), which already has a 42% stake in Reynolds American, Inc. (NYSE:RAI), will chip in $4.7 billion to buy more shares to keep the same level of ownership in the combined company and provide additional capital for the transaction.

Tobacco industry in transition

This mega-deal has been anticipated for some time, and comes as tobacco companies are facing a long-term decline in U.S. cigarette consumption, including a 4% decrease in 2013. The two growth areas in the $100 plus billion American tobacco market are e-cigarettes and menthol cigarettes and Lorillard Inc. (NYSE:LO) is a market leader in both sectors.

A couple of tobacco industry analysts expressed surprise at the fact the deal involved selling Blu, a leader in the fast-growing e-cigarette market to Imperial Tobacco.