(recasts first paragraph, adds details on e-cigs) By Jilian Mincer, Martinne Geller and Anjuli Davies NEW YORK/LONDON, July 15 (Reuters) - When Imperial Tobacco Group Plc agreed Tuesday to buy a group of brands from Reynolds American Inc and Lorillard Inc as part of their merger, the British company insisted the assets include Lorillard's blu e-cigarette unit.
The brand gives Imperial, which will become the third-largest U.S. tobacco company overall, a big lead in the new and fast-growing U.S. electronic cigarette market where it now accounts for about 47 percent of market share.
E-cigarettes are considered a crucial business for big tobacco companies, which have bought or developed their own brands in recent years to offset shrinking sales of conventional tobacco cigarettes.
Imperial, which already had an e-cigarette product called Puritane, hopes to build on blu's strong U.S. foothold worldwide, said Chief Executive Alison Cooper.
"When it comes to e-cigarettes, outside of the U.S. you haven't got strong brands," said Cooper. "The opportunity is to start getting the technology right with a great brand.
"We do think it's a great brand," she said. "The overall portfolio is what we're pleased to have bought. It's really the whole package." One source close to the deal talks said Imperial insisted that blu be part of the wider package of brands it was buying. Imperial will also acquire Reynolds' Kool, Salem and Winston brands as well as Lorillard's Maverick.
U.S. e-cigarette sales are expected to outpace sales of tobacco cigarettes by 2020, according to Wells Fargo analyst Bonnie Herzog, who said Tuesday's deal has the potential to catapult the global vapor category, "which could be increasingly M&A-driven." After decades of implementing cigarette bans and encouraging people not to smoke, "I think these (electronic-cigarette) products renormalize smoking as a behavior," said Doug Blanke, director of Public Health Law Center, at the William Mitchell College of Law.
Imperial, however, should expect intense competition from Reynolds, Altria Group Inc and some of the smaller private companies in the business, including NJOY, Mistic and VMR Products.
The e-cigarette category is still evolving, said Morningstar analyst Philip Gorham. While blu is the market leader now, he said, "we don't know for sure whether this technology will still be the leader in five years time or even two." VUSE VS. BLU E-cigarettes are slim, reusable, metal-tube devices containing nicotine-laced liquids that come in exotic flavors. When users puff, the nicotine is heated and released as a vapor containing no tar, unlike conventional cigarette smoke.
Lorillard purchased blu for $135 million in 2012. Since then its U.S. market share has soared from 10 percent to about 47 percent and revenue has quadrupled to more than $200 million.
Many attribute the growth to the savvy marketing of its founder Jason Healy, who built its rebellious image with slogans such as "Take Back Your Freedom," bikini ads in Sports Illustrated and sponsorship of concerts and car races.
Blu - unlike Vuse and MarkTen - also offers fruit-flavored e-cigarettes including Pina Colada, Peach Schnapps and Cherry Crush.
While Vuse's market share is significantly smaller than blu's 47 percent, Reynolds is the only one of the three largest U.S. tobacco companies to make its e-cigarettes in its home turf, at a factory in Kansas.
Reynolds executives have said they believe the domestic production gives them greater oversight and control of the ingredients and manufacturing of a product that has already drawn close scrutiny from the U.S. Food and Drug Administration and other regulators.
The company, which started selling Vuse roughly a year ago in Colorado and Utah, is rolling out the product nationwide this quarter.
Reynolds expects to share e-cigarette technology with top stakeholder British American Tobacco Plc and to cooperate on next-generation tobacco products, said a company spokesman.
"This agreement with BAT holds great promise for global growth in those categories and will enhance value for all shareholders," he said.
(Additional reporting by Anjali Athavaley; Editing by Lisa Von Ahn and Prudence Crowther)