Reynolds American Inc. and Lorillard Inc. are in advanced talks to combine in a deal that would dramatically reshape the U.S. tobacco landscape, creating a powerful No. 2 to industry leader Altria Group Inc., according to a person familiar with the matter.

The potential takeover would combine leading Reynolds cigarette brands such as Camel and Pall Mall with Lorillard's Newport, the top-selling menthol cigarette, at a time when the $100 billion U.S. tobacco industry is wrestling with flagging cigarette sales.

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