RICHMOND, Va. (AP) -- Cigarette maker Reynolds American Inc. is planning to buy rival Lorillard Inc. for about $25 billion in a deal to combine two of the nation's oldest and biggest tobacco companies.

The deal announced Tuesday would create a formidable No. 2 to rival Altria Group Inc., owner of Philip Morris USA, and will likely face scrutiny from regulators. It also could spur a wave of consolidation in the tobacco business, shrink factories and workforces, and push prices for cigarettes higher even as smokers buy fewer of them. The companies value the deal at about $27 billion including debt.

The companies said they will sell the Kool, Salem, Winston, Maverick and blu eCigs brands to Imperial Tobacco Group for $7.1 billion to ease regulatory concerns about competition. Imperial also will acquire Lorillard's manufacturing and research and development facilities in Greensboro, North Carolina, and about 2,900 employees. Imperial owns Bowling Green, Kentucky-based Commonwealth Brands Inc., maker of USA Gold cigarettes.

The planned merger comes as demand for traditional cigarettes declines in the face of tax increases, smoking bans, health concerns and social stigma. U.S. cigarette sales fell about 2.6 percent last year to 285 billion cigarettes, according to market researcher Euromonitor International.

But raising prices and cutting business costs has kept the industry handsomely and reliably profitable. The companies also have cut costs to keep profits up, and the larger scale of a combined company could make future cost-cutting easier.

The next step for tobacco companies is an increased focus on cigarette alternatives -- such as electronic cigarettes, cigars and smokeless tobacco -- for sales growth.