Baxi, the debt-troubled UK heating products maker, said it had agreed to merge with Dutch rival De Dietrich Remeha to boost its capital position and create one of Europe’s biggest heating products companies.

Private equity-owned Baxi, which had debt of around £630 million at the end of 2008, revealed on June 12 that it was in merger talks with its smaller rival, and said the combined company would have a turnover of €1.8 billion and employ some 6,400 staff.

The merged group will be majority-owned by the Remeha Group and be led by Rob van Banning, the De Dietrich Remeha chief executive. It will be the third-biggest boilermaker in Europe, after German groups Vaillant and Robert Bosch, with products including Heatrae Sadia showers and Potterton boilers.

Baxi and De Dietrich Remeha first discussed a merger in 2005, holding sporadic talks until mid-2008 when the two companies started seriously discussing how the merger would work, said Andrew Newington, managing partner of Baxi owner BC Partners. Electra Partners, which, along with Candover, sold Baxi in 2006 for £660 million, retains a small stake in the business.

All discussions between the parties revolved around De Dietrich Remeha taking a majority stake in the merged group or buying its larger rival Baxi, said Newington.

“In today’s market, clearly, selling them the company was less feasible: if the financing markets had been open that’s exactly what they would have liked,” said Mr Newington.

BC Partners hopes to hold its participation in the merged group for three or four years before selling to De Dietrich Remeha, said Newington, a plan it hopes will help the firm meet its target of 25 to 30 per cent gross returns.

Baxi said the merger would be a share swap, with its owners investing around €100 million of new equity.

The merger depends on debt providers agreeing to roll over into the new structure, but will not see them write down the value of their loans. With their agreement and regulatory approval the new business could be up and running by mid-September, said Mr Newington.

“Our lenders have been very supportive of what we are trying to do and will, I think, be delighted to hear news of the merger,” added Mr Newington.

Baxi last week secured a standstill and waiver agreement on its leveraged loans, which allowed it to avoid breaching cashflow and leverage covenants on its leveraged loans. Baxi’s main lender is Royal Bank of Scotland.

Before the waiver agreement Baxi had also warned that if merger talks did not lead to an agreed transaction before June 27 it would not be able to make £22.3 million of loan repayments that were also due on that day. The deal will help Baxi address its growing debt burden of which around £45 million is due for repayment this year.

De Dietrich Remeha, wholly owned by Remeha Group employs 2,200 people and had a turnover of €615 million in 2008, the company said.

The enterprise value of the combined company would be between €1.7 billion and €2 billion, according to BC Partners.

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