Camel, Newport Makers Talking Merger As E-Cigarettes Roil Industry

With the cigarette industry in trouble, it's time for big tobacco to get bigger.

On Friday, two of the largest tobacco companies in the country -- Lorillard and Reynolds American -- confirmed weeks of speculation that the two companies are discussing a major merger. The two cigarette giants have a combined market cap over $55 billion, with annual sales of about $15 billion last year.

Lorillard, the oldest continuously operating US tobacco company, is attractive for its popular menthol Newport, as well as its ownership of Blu, the e-cigarette brand it bought in 2012. Reynolds brings to the table brands Camel and Pall Mall, as well as a competing e-cig, Vuse. The combined company would create a strong #2 industry player to challenge Philip Morris owner Altria Group .

No agreement has been reached yet on terms, but British American Tobacco , which owns 42% of Reynolds, supports the potential deal and says it would like to maintain its stake in the larger company. Another rival,  Imperial Tobacco Group , is also involved in the talks to buy brands that might need to be sold as part of antitrust settlements.

The US cigarette business has been in a long steady decline as fewer Americans choose to smoke. E-cigarettes, while still a small percentage of the total market, are by far the fastest growing segment. There are many upstarts in the business, although some of the largest players have already been swallowed up by traditional tobacco companies. Blu, the brand owned by Lorillard, is the biggest seller in the US.

Lorillard shares rose 3% on the news, and are now up nearly 30% in 2014. Reynolds was down about 2%, but also remains up over 20% this year. Meanwhile Imperial was up 2%. British American and Philip Morris shares were mostly flat on Friday morning.