Tobacco giant British American Tobacco has today agreed a $49.4 billion takeover of US rival Reynolds American.

The deal will create the world's biggest listed tobacco company after it increased an earlier offer by more than $2 billion. 

BAT, which already owned 42% of Reynolds, will pay $29.44 in cash and 0.5260 BAT shares for each Reynolds share, it said.

This marks a 26% premium over the price of the stock on October 20, the day before BAT's first offer was made public. 

Reynolds, the maker of Camel and Newport cigarettes, rejected the approach a month later, according to sources, although the two sides remained in talks.

The deal values the whole of Reynolds at around $86 billion.

It will mark the return of BAT to the lucrative and highly regulated US market after a 12-year absence, making it the only tobacco giant with a leading presence in American and international markets. 

BAT's chief executive Nicandro Durante said bringing the two companies together would create a market leader with brands including Newport, Lucky Strike, Camel and Pall Mall.

"It will create a stronger, global tobacco and NGP (next generation products) business with direct access for our products across the most attractive markets in the world," he said today. 

Analysts have said the takeover could spark further deals as Philip Morris International and Japan Tobacco jostle for market share in an industry that is shrinking in the West as more people quit smoking. 

Durante said the combined group would have the largest global footprint of any tobacco group, with strong positions in both fast-growing emerging markets and lucrative Western countries.