Updated from 3:15 p.m. EDT

General Mills

(GIS) - Get Report

, which wants to be known as more than a cereal company, took a significant step in that direction Monday when it agreed to buy

Pillsbury

from its British parent,

Diageo

(DEO) - Get Report

, in an all-stock deal valued at just under $10.5 billion.

Diageo will receive 141 million shares, or 33%, of General Mills. The total value of the deal also includes $5.14 billion worth of Pillsbury debt.

The deal will allow Diageo to concentrate on its more profitable beverage divisions, while still maintaining a presence in the U.S. food market. At the same time, the deal helps General Mills to advance its ambition of becoming a food company with a broad portfolio of products.

Pillsbury makes such brands as Haagen-Dazs ice cream and Green Giant frozen foods, while General Mills produces brands such as Cheerios cereal and Betty Crocker cake mixes. Both companies are based in Minneapolis.

To avoid raising antitrust concerns, the company told analysts Monday that it would sell off Pillsbury's U.S. cake mix business.

It will also shed its Jolly Green Giant canned vegetable line, as canned goods are increasingly under pressure from store-brand labels, according to John Hughes, an analyst at

Dain Rauscher Wessels

in Minneapolis.

The deal gives General Mills a higher profile in the international scene, and a bigger footing in the foodservice industry, which is growing at a 6% annual clip compared to the 1% to 3% growth rate for retail food sales, Hughes said. Pillsbury has a foothold in restaurants and bakeries, while General Mills is prominent in college cafeterias.

"So they are getting a bigger position in a higher-growth market," said Hughes, who has a buy rating on General Mills. His firm has not acted as an underwriter for General Mills.

Some analysts had speculated that General Mills would move to sell off Haagen-Dazs, which Pillsbury operates as a joint venture with Swiss food giant

Nestle

. However, in the analyst meeting Monday, officials indicated otherwise.

"They are keeping it, which really surprised me," said Ann Gurkin, an analyst at

Davenport & Co.

who covers General Mills. She figured the company would seek to exit the ice cream business, which typically has tighter margins than other food concerns. Gurkin, whose firm has not performed investment banking services for General Mills, rates the company a buy. Her 12-month price target for the stock is 50.

The deal creates the world's fifth-largest food company and the third biggest in the U.S.

The news follows last week's

announcement that the two companies were in merger talks.

General Mills finished down 2 11/16, or 7%, at 33 5/8. Diageo's American Depositary Receipts, which are equal to four common shares, closed up 5/8, or 1.8%, at 36 7/16.