General Mills to Buy Diageo’s Pillsbury Unit for $10.5 Billion

General Mills Inc., the No. 2 U.S. cereal maker, has apparently agreed to buy Diageo’s Pillsbury unit for about $10.5 billion to add faster-growing breakfast foods to its lineup, a person familiar with the transaction said Sunday.

The deal, expected to be announced today, would add Pillsbury’s refrigerated dough and Hungry Jack pancake mixes and Green Giant frozen food to General Mills’ Cheerios cereal, giving the combined company about $13 billion in annual sales. That could help General Mills cut costs and gain clout with grocers as sales of breakfast cereals decline. The company also faces increased competition from acquisitive rivals such as Unilever.

General Mills has been buying North American food companies with products that strengthen existing lines or give a foothold in high-growth categories.

Both companies’ boards approved the transaction late Sunday. General Mills executives couldn’t be reached for comment; London-based Diageo, the world’s largest liquor company, declined to comment.

General Mills’ purchase would make it the third-biggest food company, behind Unilever, which agreed to buy Bestfoods for $21 billion recently, and Philip Morris Co., which intends to acquire Nabisco Holdings Corp. for $15 billion. It also adds pressure to a wide range of food companies to consider mergers or acquisitions, analysts said.

Among them, H.J. Heinz & Co., Campbell Soup Co. and Kellogg Co. might need to get larger, analysts have said.

After the Pillsbury purchase, General Mills could become a takeover target for bigger rivals such as Nestle, which would be interested in Pillsbury’s Haagen-Dazs ice-cream and yogurt brand, said analyst Herb Achey of U.S. Trust. General Mills and Nestle have a joint venture to make cereals in Europe.

Diageo might abandon the food business in favor of faster-growing liquor brands, such as Johnnie Walker whiskey and Smirnoff vodka. Liquor generated more than half of last year’s operating profit for the company.

“This dramatically enhances General Mills’ position in the refrigerated section of supermarkets and gives them strong platforms for new product growth,” said analyst John O’Neil of PaineWebber Inc.

Minneapolis-based General Mills would pay $5.4 billion in stock and $4.5 billion in cash. Diageo would have a 33% stake in General Mills-Pillsbury and two seats on the company’s board, the person said. Diageo also apparently agreed to accept about $600 million in “contingent value rights,” should GM stock not rise above $42.

General Mills ended Friday at $36.31 on the New York Stock Exchange; Diageo’s American depositary receipts closed at $35.81.