UPDATE 3-UK boilermaker Baxi agrees merger with De Dietrich

* Merger to be structured as share swap

* Transaction set to close in second half of 2009

* Combined group to have turnover of 1.8 bln euros

* New group's enterprise value put at 2 bln euros

(Adds BC Partners comment)

By Rhys Jones and Simon Meads

LONDON, July 3 (Reuters) - Debt-troubled UK heating products maker Baxi [BCPRTG.UL] said on Friday 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 pounds ($1 billion) 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 euros and employ some 6,400 staff.

The merged group will be majority-owned by the Remeha Group and be led by De Dietrich Remeha Chief Executive Rob van Banning. It will be the third-biggest boiler maker in Europe, after German groups Vaillant and Robert Bosch [ROBG.UL], boasting 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, Andrew Newington, managing partner of Baxi owner BC Partners [BCPRT.UL], told Reuters in a telephone interview.

Electra Partners which, along with Candover, sold Baxi in 2006 for 660 million pounds ($1.08 billion), 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 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 percent gross returns.

EQUITY INJECTION