Kirch: Business vs. politics

Leo Kirch has yet to agree to a rescue effort involving HVB Group, Germany's second-largest bank

LONDON, England (CNN) -- Germany's federal election in September is increasingly being viewed as much a corporate battle as a political one.

While both Chancellor Gerhard Schroeder and challenger Edmund Stoiber have made the economy the focus of their campaigns, it is the problems of one company in particular that have attracted the candidates' attention.

KirchGruppe, Germany's second biggest media company behind Bertelsmann, is struggling to crawl out from under a $5 billion mountain of debt. Some estimates put the debt much higher because of the sprawling group's appetite for making deals.

The group, which is majority owned by entrepreneur Leo Kirch, 75, has amassed huge losses in its pay-TV business and is now faced with takeover threats or possible bankruptcy.

The assets of the company, based in the Bavarian capital of Munich, would be sure to attract investors interested in buying either all or part of the company.

Its core television group includes pay-TV Premier, home shopping network HOT and Spanish broadcaster Telecinco. In addition, it has a 40 percent stake in Axel Springer Verlag, the group which publishes the influential newspapers Bild and Die Welt. As well, KirchGruppe owns the biggest film library outside of the United States.

KirchGruppe also has the rights to Formula One racing, through its 58 percent stake in the company SLEC, and the rights to World Cup football.

In the run-up to the election, there has been a flurry of media reports and rumours chronicling Kirch's various efforts to save his empire -- such as the possible sale of the group's stakes in SLEC, Alex Springer, Telecinco and HOT.

There is speculation as well that the group may delay a merger of its media and television units -- scheduled to be completed in June -- as it focuses on resolving its financial crisis.

Schroeder, above, has led the charge to save KirchGruppe from outside companies, including Murdoch's BSkyB

KirchGruppe's fate could have a profound effect on the way corporate Germany works and how the country is viewed outside its borders, especially now that the country has slipped into recession and has run up its budget deficit precariously close to the European Commission's ceiling.

"Germany is in trouble. Something needs to change," says James Stewart, chief economist at Weavering Capital in London.

The significance of the problem has not been lost on the political candidates and the corporate constituencies they represent.

In an election year, the thought of such a high-profile German company collapsing or, perhaps worse, falling into foreign hands has prompted calls for a "national solution."

Schroeder, who heads the ruling Social Democrats, has led the charge to save KirchGruppe from the clutches of outside companies -- with the most visible threat being media baron Rupert Murdoch.

Through his company British Sky Broadcasting, Murdoch already owns part of KirchGruppe's pay-TV business. In early February, BSkyB wrote off its investment in Premier, although it still has an option to force KirchGruppe to buy back the 22 percent stake in October if -- as per the original agreement -- the company has not been publicly listed by that time.

Meanwhile, Schroeder's political opponent, Stoiber, is the state governor of Bavaria, where Leo Kirch has run his empire for the past 50 years. Kirch is known to have donated money to Stoiber's conservative party, the Christian Democrats.

And while Schroeder has been seeking an all-German solution, Stoiber has been looking for a "Bavarian solution."

This would see Munich-based HVB Group, Germany's second-largest bank, buy KirchGruppe's 40 percent stake in Axel Springer for 1.1 billion euro ($950 million) as part of a broader restructuring effort.

Although Kirch himself has yet to agree to the offer, the rescue effort has attracted interest from other Bavarian banks, including the state-owned Bayerische Landesbank.

But other creditors, including Deutsche Bank and Dresdner Bank, want back the money they have already invested. KirchGruppe is reportedly planning to use part of the proceeds from the sale to HVB to pay back a 700 million euro loan to Deutsche Bank, which asked for its money in December but later pushed the deadline to April.

Bavarian governor and candidate for chancellor Edmund Stoiber has sought a "Bavarian solution" to Kirch's woes

Deutsche Bank has taken a tougher stand than most banks in the whole Kirch affair. Analysts see this as part of a tug-of-war between Frankfurt and Munich for corporate dominance in Germany.

While Bavarian-based banks have been adamant in taking care of their own financial affairs, such as those involving KirchGruppe, Deutsche Bank has set a more pan-German and, more recently, global tone to doing business.

In January, it announced it was scrapping the traditional German consensus-driven management style in favour of one based more on the U.S. model, in which the chief executive calls more of the shots.

"There's a complete difference culturally," says Weavering's Stewart. "It's a generational change as well."