Reynolds American Inc (RAI) is in "late stage talks" to acquire Lorillard in what would be a merger between the second and third largest US tobacco companies, Reuters said in a story citing unnamed sources.

British American Tobacco (BAT), which owns 42 per cent of RAI, could be a third-party through the deal by helping RAI finance the acquisition, the news agency reported. Under that option, BAT would retain its holding in RAI, according to Reuters. Other options reportedly are under discussion.