In an agreement which is expected to be finalised in the summer this year, Nestlé will transfer its facilities in Italy and France to Barry Callebaut as well as granting the cocoa processor a long-term supply contract to provide 43,000 tonnes a year of liquid chocolate to the Nestlé's Russian operations.
Restructuring has been a feature of Nestlé's company strategy since last year.
In September the chocolate producer shifted production of core brands Smarties and Black Magic from the UK to mainland Europe while investing £20 million (€29.8m) in its York factory.
And last month the company announced it would construct a new €38 million production facility in Ukraine to increase its position in the country's domestic market.
This week's deal forms part of a strategic move by Nestlé to turn the company's focus away from the lower end of the cocoa supply chain.
The owner of the KitKat and Crunchie brands will be jettisoning its cocoa liquor and chocolate mass production factory in Perugia as well as its factory in Dijon.
In November last year Nestlé began looking for a partnership to boost ailing production at the French factory which manufacturers the iconic Lion bar brand.
Volumes had significantly decreased due to waning sales of the chocolate – volumes fell by around 50 per cent over 10 years.
In a statement, Nestlé said: "Widening the product range should reverse declining volumes and improve the competitiveness of this plant.
Nestlé will outsource the production to Barry Callebaut who, in addition, can use the existing capacity and equipment to manufacture some of its own products."
Barry Callebaut produces cocoa and chocolate ingredients for the confectionery industry as well as owning a handful of European chocolate brands.
The company is keen to take advantage of the trend for outsourcing in the confectionery industry.
The company's CEO Patrick de Maeseneire said: "With a limited investment the supply agreement with Nestlé would increase our sales volume as of next fiscal year 2007/08 and would provide us with free production capacity allowing us to target the Southern European markets in a more tightly focused way."
"It would also mark an important step ahead in our strategy to be the outsourcing partner of choice for co-manufacturing brand packaged consumer products."