R.J. Reynolds Tobacco Holdings Inc. (RJR) agreed Monday to acquire British American Tobacco Plc (BTI)'s U.S. tobacco business and a second unit for about $3 billion, creating a stronger No. 2 competitor to market leader Philip Morris (MO).

The new entity, to be called Reynolds American Inc., will boast annual revenues of about $10 billion and more than 30 percent of the cigarette sales in the United States, the companies said.

The cash and stock deal unites RJR's R.J. Reynolds Tobacco Co., maker of Winston, Camel, Salem and Doral cigarettes, with BAT's Brown & Williamson Tobacco Corp. (search), the home of such brands as Kool, Pall Mall and Carlton.

The transaction is expected to add to both companies' earnings by an unspecified amount.

As part of the deal, RJR, based in Winston-Salem, North Carolina, will assume Brown & Williamson's liabilities under the tobacco industry's master settlement agreement reached with the U.S. government in 1998. RJR will also indemnify Brown & Williamson against any future litigation related to the U.S. business.

London-based BAT will in turn fund the appropriate cash for the settlement payments, currently expected to average about $750 million a year, an RJR spokesman said.

"The combination of these companies will enable us to achieve tremendous efficiencies and will greatly enhance our ability to compete effectively in the U.S. market," Andrew Shindler, RJR's chairman and CEO, said in a statement.

The new company will have about 150 million shares outstanding, with RJR holders owning 58 percent. BAT will own the remaining stake, currently valued at $2.6 billion in stock, based on RJR's closing stock price Monday.

RJR will also pay BAT $400 million in cash to acquire the stock of Lane Ltd. (search), a unit that distributes Dunhill tobacco and makes other products, and assume certain liabilities