Olam International Ltd (OLAM.SI) will buy Archer Daniels Midland Co's (ADM.N) cocoa business for $1.3 billion, it said on Monday, catapulting the Singapore-based commodities merchant into the top tier of the niche bean processing industry.

Buying one of the world's largest processors and suppliers of cocoa liquor, powder and butter, Olam will secure eight factories stretching from the Ivory Coast to Singapore with total capacity of 600,000 tonnes per year.

Combined with Olam's five bean grinding facilities and its global trading operations, the deal will create one of the largest players in the 4-million tonne industry, competing with Barry Callebaut (BARN.S) and Cargill.

Olam Co-Founder, Group MD and Chief Executive Office, Sunny Verghese, said in a statement the deal was a "transformational opportunity" for the company, which has been revitalized following the takeover of Singapore sovereign wealth fund Temasek earlier this year.

The transaction is expected to add to earnings and be free cash flow positive in the first full year after closing, it said.

The acquisition will also be seen as a bet on long-term growth in demand in Asia, where consumers' appetites for candy and cookies is burgeoning.

Even so, competition in grinding, which produces butter and powder used to make chocolate bars and drinks, has increased in recent year as major players expand capacity in Asia and margins have been squeezed by soaring, volatile bean prices.

For ADM, the deal comes just months after offloading its smaller underperforming chocolate business to rival Cargill for $440 million, and dropping plans to sell its cocoa operations.

A spokeswoman for the Chicago-based company said it had not been looking to sell the business.

Cargill had been the front runner to buy the combined cocoa and chocolate business, but experts said a deal of that size would have raised regulatory concerns, particularly in Europe.

With less overlap in regions like Europe, Olam's takeover may have fewer competition concerns.

ADM will redeploy capital to investments with better returns potential and less volatility than the cocoa business, or distribute excess capital to shareholders, or a combination of both, said ADM Chairman and CEO Patricia Woertz.

Olam will finance the purchase, which it expects to close in the second quarter next year, through a combination of cash and existing debt facilities, it said. JPMorgan is its financial adviser.