Financial Alchemy: How Breton Pulleys Create Illusory Leverage and Value

Part 2 of a Bridge Connect Series: Breton Pulleys and the Illusion of Control: How Circular Ownership Distorts Corporate Reality

1 Leverage Without Debt

Financial leverage normally arises from borrowing: debt amplifies returns on equity by using other people’s money.In a Breton Pulley, the same effect is achieved without explicit debt. The circular ownership allows profits to be recycled, dividends to be reinvested, and voting control to multiply — creating a form of synthetic leverage that is invisible on the balance sheet.

At first glance, each company’s accounts look healthy: dividends in, dividends out, rising retained earnings. But when the loop closes, the same euro circulates through multiple ledgers, each time appearing as fresh capital.

“Breton Pulleys don’t borrow money — they borrow reality.”

2 The Bolloré Blueprint

Bolloré S.A. and its holding company Compagnie de l’Odet form a textbook example.Odet owns roughly 64 % of Bolloré S.A.; Bolloré S.A., in turn, owns significant stakes back in Odet and other affiliates.Each year, dividends and share buybacks move within this circle, reinforcing control and liquidity.

When Vivendi (a Bolloré-controlled entity) paid dividends up to Bolloré S.A., those funds partly financed further investment in Odet, which then increased its stake in Bolloré S.A. — a self-feeding cycle. Analysts estimated that effective leverage — the ratio of controlled assets to direct capital invested by the family — exceeded 5×, even though book leverage appeared below 1×.

This is why Muddy Waters labelled the system a “Breton Pulley”: the rope of ownership loops around itself, magnifying the founder’s lift with minimal effort.

3 How the Illusion Compounds

Step 1 — Circular Equity:Entity A owns 51 % of B, B owns 51 % of C, C owns 30 % of A.Each layer treats its shareholding as an asset.Each revalues that asset upward when the next layer’s share price rises.

Step 2 — Reinforced Valuation:A rise in C’s value boosts A’s balance sheet (via C → A stake).That increase boosts B (via A → B ownership), which then feeds back to C.The feedback loop creates valuation resonance — small real gains amplified through self-reference.

Step 3 — Dividends as Funding:Instead of external capital, the group finances growth by paying dividends internally.Each company receives cash it just distributed, maintaining liquidity without new money.

Step 4 — Reported Profit Inflation:Because each entity recognises its dividend income separately, consolidated earnings across the loop can appear multiple times larger than the underlying cash generation.

The result: paper value expands faster than real value, and capital efficiency ratios improve—until an external shock exposes the duplication.

4 Accounting Treatment and Grey Zones

Under IFRS 10 and IFRS 12, consolidation is based on control, not percentage ownership.Yet circular control is ambiguous: if A controls B and B controls A, who consolidates whom?In practice, auditors consolidate the uppermost legal parent (Odet in Bolloré’s case) and eliminate intra-group dividends.However, where minority public stakes intervene, partial loops persist.

Why the risk remains:

• Disclosure focuses on linear shareholding, not cycles.

• Related-party disclosures omit entities below consolidation thresholds.

• Upstream investments in the parent are sometimes recorded at cost, avoiding fair-value volatility.

The accounting therefore removes the surface reflections but not the underlying distortion in control and valuation perception.

5 Mirror Earnings and NAV Inflation

Analysts sometimes call the phenomenon mirror earnings: profit seen twice from different angles.If C pays a dividend to A, and A’s rising profit increases B’s valuation, both A and B record gains derived from the same underlying cashflow.When investors aggregate earnings across the group, they overestimate true profitability.

For conglomerates listed on multiple exchanges or with multiple reporting currencies, this inflation compounds.Market participants then value each entity on reported metrics, not real consolidated cashflow — leading to the Breton discount once the loop is recognised.

6 Why Markets Tolerate It

1. Control Comfort: Investors assume founders with entrenched control will protect long-term value.

2. Complexity Premium: Analysts struggle to unpick structures; opacity becomes accepted as sophistication.

3. Liquidity Illusion: Multiple listed vehicles suggest market depth when the float is actually thin.

4. Tax Optimisation: Internal dividends often avoid withholding taxes, making the loop economically efficient — until regulation tightens.

7 When the Pulley Backfires

Circular leverage is stable only while share prices and dividends remain constant.Once one node cuts dividends or suffers write-downs, the feedback loop reverses.

In 2018–2020, market re-ratings of Vivendi and the French media sector caused the Bolloré ecosystem to experience valuation compression. The controlling family’s exposure rose as they injected fresh capital to maintain holdings.

The same physics apply elsewhere: Japan’s cross-shareholdings after the 1990 crash trapped capital for decades; Korean chaebols faced cascading margin calls during the Asian Financial Crisis.

“In good times, a Breton Pulley compounds wealth; in bad times, it compounds fragility.”

8 Parallel Risks in Telecom and Infrastructure

Bridge Connect observes similar structural risks in telecom and infrastructure investment platforms:

Mechanism	Description	Hidden Risk
SPV Loops	Project SPVs owning minority stakes in their parent fund or management co.	Synthetic leverage, unclear recourse.
JV Cross-Holdings	Each partner holds equity in the other’s vehicles.	Control diffusion, valuation circularity.
Vendor Financing	Equipment vendors hold convertible notes in operators that buy their kit.	Revenue inflation, exposure to customer solvency.
Public-Private Funds	Municipal entities co-own infrastructure funds that in turn invest in municipal SPVs.	Double counting of assets on public balance sheets.

In each case, the economic effect mirrors a Breton Pulley: perceived diversification conceals self-reference.

9 Detecting the Financial Alchemy

Boards and investors can apply a simple three-step diagnostic:

1. Map Ownership as a Graph, Not a Tree.If edges loop back, ask why.

2. Follow the Cash.Trace dividend and loan flows over time; if funds circulate without external injection, you may have circular financing.

3. Compare Voting Power to Capital at Risk.Large divergence implies synthetic leverage.

Modern analytics tools such as Neo4j graph databases or visual ledger mapping can reveal these loops in seconds — yet few boards commission such analysis.

10 Governance and Fiduciary Implications

For directors, Breton Pulley exposure creates three fiduciary blind spots:

• Transparency Gap: Board members may sign off on statements showing healthy capital without understanding inter-entity dependencies.

• Conflict of Interest: Directors serving on multiple linked entities face self-approval of related-party transactions.

• Risk Propagation: A single write-down propagates through consolidated goodwill and investment valuations.

Bridge Connect recommends that audit and risk committees introduce structural audits — annual independent mapping of ownership and funding flows — alongside financial audits.

11 Why the Pulley Appeals to Founders

1. Retained Control: Minimal dilution while raising external capital.

2. Tax Efficiency: Dividends circulate tax-light between domestic subsidiaries.

3. Balance Sheet Optics: Low visible leverage supports credit ratings.

4. Psychological Comfort: A sense of self-sufficiency — the group funds itself.

But these advantages come with deferred risk. Once simplification becomes necessary — for succession, sale, or refinancing — untangling the pulley is costly and politically sensitive.

12 Quantifying the Hidden Leverage

Bridge Connect modelling shows that a three-layer ownership loop can multiply control leverage by roughly 2.5 – 3.0×depending on share ratios.Example:

Layer	Ownership	Control Flow	Effective Exposure
Founder → A	25 %	Direct	25 %
A → B	51 %	Indirect Control	12.75 %
B → C	51 %	Indirect Control	6.5 %
C → A	51 %	Loop Back	adds ≈ 12 % effective control
Total Control	—	—	≈ 56 %

Economic ownership = 25 %, effective control ≈ 56 %.That’s a 2.2× leverage factor achieved entirely through equity recycling.

13 Investor Re-Pricing and Market Reaction

Once markets understand the loop, discounts widen sharply.Bolloré’s 2021–2023 simplification (buying out minorities, collapsing subsidiaries) narrowed its “holding-company discount” from >40 % to ~20 %.Investors rewarded transparency even though consolidated profits fell — proof that clarity commands a premium.

In telecoms and infrastructure, private funds adopting look-through reporting similarly see improved investor appetite and lower cost of capital.

14 The Regulatory Drift

Expect growing scrutiny from:

• EU ESG Disclosure Regulations: requiring transparent ultimate-beneficiary reporting.

• OECD BEPS 2.0: challenging intra-group dividend and royalty recycling.

• UK Companies Act Amendments: expanding “persons with significant control” registers to include circular ownership.

The direction of travel is clear: opacity is no longer an asset.

15 Bridge Connect Perspective

Breton Pulleys expose a broader corporate pathology: the desire to engineer certainty through structure.Boards mistake architectural complexity for risk management, when it often conceals fragility.

Bridge Connect advises clients to treat ownership architecture as part of strategic resilience — akin to cybersecurity or supply-chain continuity.In critical-infrastructure and telecoms markets, structural transparency is fast becoming a condition for investor confidence, regulatory approval, and even national-security clearance.

“True strength is not how many ropes you can loop — it’s knowing which one still touches the ground.”

16 Conclusion — When Finance Becomes Fiction

Breton Pulley structures demonstrate that financial statements can be perfectly accurate yet economically misleading.They show how control, value, and leverage can be decoupled — and why boards must understand the geometry of their own companies, not just the numbers.

For investors and directors alike, the remedy is transparency: map the loops, break the illusions, and ensure every rope leads back to real capital.