American Tobacco, owned by the American Brands conglomerate, has a 7 per cent share of the US domestic market to add to the 11 per cent share held by Brown & Williamson, BAT's US subsidiary.
The market is dominated by Philip Morris, with a 40 per cent share and RJ Reynolds, with 25 per cent.
The deal reunites two halves of a company founded by the North Carolina tobacco baron Buck Duke that was divided in 1911.
It gives BAT a raft of new secondary brands, including Carlton, Lucky Strike, Pall Mall and Tareyton, as well as very strong presence in the market for discount 'generic' cigarettes.
As part of the deal, American Brands - which owns the UK's Gallaher Tobacco, maker of Benson & Hedges and Silk Cut - will also give BAT rights to Silk Cut outside Britain.
The merger reinforces BAT's position at a time of unprecedented anti-smoking feeling in the US.
Tobacco shares have been buffeted not only by price wars, but by proposals for a new 75-cents-a- packet 'sin' tax to pay for US healthcare reform, smoking bans by American fast-food chains, and threats by Congress to regulate tobacco as a narcotic.
The US Food and Drug Administration has suggested that some companies have manipulated levels of nicotine to make their products more addictive, obliging executives of seven leading cigarette makers to appear before a televised congressional committee to deny the charge.
In an effort to counter claims that cigarettes contain toxic chemical additives, the companies also released a previously secret list of 600 ingredients they use to flavour their products.
The hostile climate has affected cigarette makers, putting pressure on their corporate parents to isolate them from other operations, either by spinning them off or selling them outright.
Companies such as BAT and American Tobacco, which sell large numbers of generic cigarettes, are also expected to suffer disproportionately from healthcare reform: the tax on packets of discount and premium- brand cigarettes will be at the same rate, not related to price.
A BAT spokesman said the acquisition price was less than 10 times American Tobacco's earnings in 1993 and would enhance BAT's own earnings from the outset.
The US market remained highly attractive to BAT despite its extremely competitive nature and some challenging social attitudes.
Martin Broughton, chief executive, said: 'This acquisition makes immediate financial sense, enabling us to achieve a stronger position by combining the best of each company's operations in the US. It will provide considerable benefits for consumers through the creation of a more effective third force in the market.'
He said the American Tobacco acquisition confirmed BAT's commitment to tobacco and complemented the company's long-term growth opportunities elsewhere in the world.
Analysts approved of the purchase and BAT shares closed 12.5p higher at 456.5p in London.
Mark Duffy of SG Warburg said: 'This deal is imaginative and quite well priced but is essentially defensive.
'American Tobacco's margins are 13 per cent against 10 per cent at Brown & Williamson and the acquisition will provide cost savings after US excise duties are increased later this year,' he said.
Some market analysts say the sell-off of tobacco shares has gone too far. Earnings, which suffered from last year's premium-brand price wars, have largely recovered, and US smoking rates are proving remarkably resilient in the face of the negative publicity; some 55 million Americans continue to use tobacco products.
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