Dunhill and Lucky Strike firm British American Tobacco has agreed a £40.8 billion takeover of US rival Reynolds in a deal creating the world's largest listed tobacco company.

BAT, which currently owns 42.2% of Reynolds and has a base in Southampton, will pay 59.64 US dollars (£49.27) per share for the remaining 57.8% of the company in an improved offer after originally tabling a 47 billion US dollar (£38.8 billion) approach in October.

The deal will bring together a raft of global brands under one roof, including BAT products Rothmans, Kool and Kent, and Reynolds' brands such as Newport, Camel, Pall Mall, Doral, Misty and Capri slims.

The offer comprises 25 billion US dollars (£20.6 billion) worth of BAT shares and 24.4 billion (£20.1 billion) US dollars in cash, valuing Reynolds at more than 85 billion US dollars (£70.2 million).

The sweetened deal represents a 26% premium against the closing price of Reynolds' shares on October 20.

BAT is expecting to make at least 400 million US dollars (£330 million) in cost savings after the two companies merge.

Chief executive Nicandro Durante said: "Our combination with Reynolds will benefit from utilising the best talent from both organisations.

"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."