Tropic Oils Up

Tropic Networks Inc. will remain an optical networking company after its complex merger with two oil and gas firms.

It turns out the merger is a way for Tropic to pick up $9.4 million Canadian (US$8.17 million) in extra funding without having to issue new shares. (A venture-financed round would have involved new shares, diluting the stakes of prior investors.) Put another way, Tropic gets some cheap money out of the deal.

"Tropic will continue exactly as it did before," says Robert Lane, Tropic's vice president of marketing (and natural gas).

The deal has Tropic merging with Canadian oil companies Chamaelo Exploration Ltd. and Tournament Energy Ltd. As outlined by Light Reading yesterday, the companies are merging into one firm run by Chamaelo's management and operating under Chamaelo's name. Tropic formally announced the structure of the deal today. (See Tropic Goes to the Well and Tropic Reorganizes.)

Tropic as we know it will be spat out of the merged entity and will reclaim the name Tropic Networks. So in the end, publicly held Chamaelo stays Chamaelo and gets bigger, while Tropic stays Tropic and picks up some more funding.

As for the $87.75 million Canadian (US$76.22 million) raised as part of the deal -- that's going to the new oil company. The $8.17 million being handed to Tropic is unrelated to that funding, says Gord Wyse, Tropic's CFO.

But if Tropic gets the funding, what do the oil companies get from all this? They'll be picking up "non-core" assets from Tropic -- Wyse wouldn't specify further -- and some losses that the new Chamaelo can exploit for tax purposes. The crux of the deal could be Tropic's losses, which could have beneficial tax implications for the new Chamaelo. The combined companies will have $271 million in "federal tax pools and loss carry-forwards" and $19 million in investment tax credits, according to documents filed with Canada's System for Electronic Document Analysis and Retrieval (SEDAR). Not all of those losses and credits come from Tropic.

One side-effect of the deal is that some of Tropic's financial information is now public. Tropic reported revenues of US$8 million and losses of US$32.4 million for the year ended June 30. The company has 126 employees, 97 of them full-time.

Shareholders of all three companies will vote on the merger this month. Tropic's shareholders get the first crack, on Dec. 22.

— Craig Matsumoto, Senior Editor, Light Reading