Business Correspondent Greg Wood: "More mergers and factory closures are inevitable"

The new group will own a plethora of leading cigarette brands including Lucky Strike, Peter Stuyvesant, Benson & Hedges, Dunhill and of course Rothmans.

However, the deal will lead to job losses among the merged group's 3,500-strong UK workforce. BAT employs 200 people at its London headquarters and 900 workers at a factory in Southampton which makes cigarettes for export. Rothmans has two plants in the North East in Spennymore and Darlington.

A spokesman for BAT said: "There will be job losses sadly, but it is too early to say what they will be."

Unions expressed concerns about the impact of the merger. "We are particularly concerned over the implications for employment in the North East, an area already badly hit by the downturn in manufacturing," said Roger Lyons, chief executive of the MSF union.

Market leader

The deal will create one of the largest cigarette producers in the world, with a leading market position in Latin America, Africa, Asia and Australia, as well as a large share of US and Western European markets.

The new company will rank just behind Philip Morris, makers of Marlboro, among private brands. Only the Chinese National Tobacco Company - with an estimated one-third of the global market - would be substantially larger.

Rothmans has pulled off a king size deal

The merger brings together the second and fourth largest international global cigarette companies, with a combined volume in 1997 of over 900bn cigarettes and a world-wide market share of over 16%.

Rothmans also owns the international merchandising rights to its most famous brands.

BBC's Simon Gompertz explains what the deal means

Martin Broughton, chairman of British American Tobacco, said: "This merger represents a major step forward in the achievement of our vision to become the world's leading international tobacco company."

Health groups condemned the deal. Anti-smoking group ASH said: "Whatever the commercial interests are, this deal is likely to have a negative health impact. It will result in more people dying worldwide because these companies are targeting developing countries and encouraging more people to smoke."

Cost savings

The two groups hope the deal will lead to cost savings of £250m, some of which will be achieved by job cuts.

Martin Broughton, chairman of British American Tobacco: 'Major step foward'

The deal is designed to improve the profit performance of the two tobacco magnates.

The tobacco industry has been under a cloud over the past few months, hit by flat sales in the mature markets of the developed world and dogged by escalating legal action by smoking victims and US health authorities.

However, demand for cigarettes is still rising sharply in the developing world, and that is where tobacco groups are looking to expand.

Shares soar

The merged group will be one of the world's largest cigarette producers

Shares in BAT soared when the London stock market opened, rising 71p, or more than 13%, to 612p by 1050 GMT after City analysts welcomed the deal.

Under the deal, Rothmans' joint owners, Swiss luxury goods group Richemont and South African investment group Rembrandt, will own 35% of the new company. Shares in Richemont surged on the Swiss stock market on news of the deal.

The two companies hope the merger, which is dependent on approval from competition authorities, will be completed by the second quarter of the year.

However, there are fears that the deal will significantly reduce competition in the tobacco industry and could lead to higher cigarette prices. As such, the deal could be delayed by an in-depth investigation by competition watchdogs.

BAT recently hived off its financial services operation to focus on its tobacco interests.