Reynolds American Inc. is nearing a deal to acquire Lorillard Inc. that, if successful, would transform the U.S. tobacco industry and put additional corporate muscle behind the already hot electronic-cigarette market.

The companies on Friday confirmed talks about a deal that would combine Reynolds' Camel and Pall Mall cigarettes with Lorillard's popular Newport menthol brand to create a more powerful No. 2 to U.S. industry leader Altria Inc., maker of Marlboro. Reynolds and Lorillard have a combined stock-market capitalization of more than $50 billion.

The potential tie-up faces significant risks, including tough antitrust scrutiny. The U.S. Food and Drug Administration is also weighing a possible crackdown on menthol cigarettes, which fuel more than 80% of Lorillard's sales, after the agency banned all other cigarette flavors in 2009.

The companies confirmed they are in talks to sell certain brands to Imperial Tobacco Group PLC, a move that would likely ease regulatory concerns.

A deal would give Reynolds a jump on Altria in electronic cigarettes, the small but fast-growing alternative to traditional smokes. Both companies had been slow to enter that market, only beginning to roll out their brands nationally this summer. As part of a merger, Reynolds would get Lorillard's Blu e-cigarette brand, which has more than a 40% market share in U.S. convenience stores.