Boyar’s Micro Cap Focus Volume I, Issue III June 18, 2010

PUBLISHED BY: MARK BOYAR & COMPANY, INC. · 35 East 21 St. · Suite 8E · New York, NY 10010 TEL: 212-995-8300 · FAX: 212-995-5636

www.boyarvalue.com Boyar‟s Micro Cap Focus is not an investment advisory bulletin, recommending the purchase or sale of any security. Rather it should be used as a guide in aiding the investment community to better understand the intrinsic worth of a corporation. The service is not intended to replace fundamental research, but should be used in conjunction with it. Additional information is available on request. The statistical and other information contained in this document has been obtained from official reports, current manuals and other sources which we believe reliable. While we cannot guarantee its entire accuracy or completeness, we believe it may be accepted as substantially correct. Mark Boyar & Company, Inc., its officers, directors and employees may at times have a position in any security mentioned herein. Mark Boyar & Company, Inc. Copyright 2010.

Featured Company: DHX Media Ltd.

Summary Data:

Ticker: DHX

Exchange: TSX

Price: $0.90

52 week High/Low: $1.65/$0.55

Diluted Shares (MM): 71.4

% Closely Held: Insiders own 23.5%

Market Cap ($MM): $64.3

Net Cash: $25.7

Enterprise Value ($MM):* $38.6

Volume (3 mos. Avg): 89,112

Sector: Consumer Discretionary

Fiscal Year Ends: June 30

Intrinsic Value: $1.39

% Upside to Intrinsic Value: 54%

*Enterprise value excludes $29.9 million interim production financing backed by receivables & tax credits.

NOTE: All dollar values in this report represent Canadian Dollars unless otherwise noted.

Clients of Boyar Asset Management, Inc. do not own shares of DHX common stock. Analysts

employed by Mark Boyar & Co., Inc. do not own shares of DHX common stock.

Investment Thesis

DHX Media Ltd. (“DHX” or “the Company”) is a Canadian media company whose core business is the proprietary production and distribution of original television programming, with a concentration in educational children‟s and family programming. Recent results have been severely impacted by the drop in broadcasters‟ advertising revenue, which has led broadcasters to reduce demand for new television content and negotiate down licensing fees. As a result, revenue has declined 38.8% year-to-date (YTD) through 3Q2010 (fiscal year ended June 30, 2010) to $31.4 million. (Note: All dollar amounts represent Canadian dollars unless otherwise noted. CAD/USD=0.978.) However, in our view DHX‟s underlying business model remains strong. We last discussed in our flagship publication Asset Analysis Focus (AAF) in an October 2008 update of Discovery Communications how alternative television content (such as Discovery non-fiction or educational content) travels particularly well globally and offers a longer shelf life. The same holds true for DHX‟s production content (~2,400 half-hours in its proprietary library), approximately 75% of which is children‟s programming. Children‟s content tends to be culturally neutral and less dated than other programming. This enables DHX to distribute its library to more than 200 different broadcast customers throughout the world (cartoons are easily dubbed, and broadcasters typically pay the translation costs). Importantly, DHX‟s three productions studios in Canada allow it to take advantage of generous Canadian subsidies. Combined with content licensing pre-sales, this enables DHX to directly contribute no more than 15% of a production budget‟s capital requirements.

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Due to these advantages, DHX has maintained a 37.1% gross margin and an 8.3% EBITDA margin (which includes SG&A expenses) YTD through 3Q2010 despite the precipitous decline in revenue.

Although proprietary production revenues have remained depressed through 3Q2010, backward-looking investors may not be accounting for the 12-18 month lag between the commissioning of new television programming and the delivery and revenue recognition of the programming. DHX announced two new commissions in the past month, and we expect DHX to announce several more new commissions within the next quarter. Recent advertising trends also suggest production commission rates will return to more rational levels in fiscal 2011. After a $19 million equity raise in April (at $1.30 per share), DHX now sits on $29 million in cash or approximately $26 million in net cash (excluding short term production financing backed by receivables and tax credits). A plausible use of this cash is the acquisition of a library of content distribution rights, which the Company could easily scale up in terms of global licensing through DHX‟s pre-existing network. The large cash position insulates DHX from funding issues and could make the Company an attractive leveraged buyout candidate. At the current price, DHX shares trade at only a 6.5x EV/TTM EBITDA multiple on what we anticipate may ultimately prove to be trough EBITDA levels. We estimate EBITDA of $8.9 million in 2012 (versus $9.8 million in 2009), and using an 8x multiple our estimated intrinsic value for DHX is $1.39 per share (implying 54% upside from current levels). By contrast, DHX received a takeover bid (though it later fell through) valuing the Company at a 10.6x EV/TTM EBITDA multiple as recently as September 2008 (post-LBO mania). In a healthier environment, DHX could potentially garner an even higher takeout multiple.

We would also note that merchandising and licensing (“M&L”) revenues represent the real endgame reward for a successful children‟s program. While DHX has not yet established a show with enough popularity to garner significant toy and other licensing contracts, its animated Animal Mechanicals series has produced strong international ratings and is set to debut on the new Discovery/Hasbro network „The Hub‟ in the US this October. A master toy deal could follow shortly, and should the show become a hit in the US, the long-term earnings payoff has the potential to top the Company‟s current market capitalization. In our base estimates, we conservatively do not account for an M&L hit. We prefer to view the Animal Mechanicals rollout as

essentially a free call option attached to DHX shares with the outside possibility of a large payoff.

Business Overview

DHX Media was incorporated in Nova Scotia, Canada in February, 2004 (as Slate Entertainment, and later Halifax Film). In early 2006 DHX acquired Decode Enterprises, which focuses on the production of children‟s and family television and includes an extensive worldwide distribution network. DHX financed the Decode acquisition through an IPO and debuted on the Toronto Stock Exchange on May 19, 2006. The Company primarily derives its revenue from three businesses related to the creation of television and film programming: production, distribution, and producer and servicer fees. DHX also generates ancillary revenue from music and royalty (including licensing and merchandising of proprietary material) sales, new media sales (internet, mobile phone, video-on-demand, etc.), and property rental.

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DHX produced 283.5 half-hour episodes of proprietary original production in fiscal 2009. The associated sales of initial broadcast rights generated 71% ($44.1 million) of Company-wide revenue in fiscal 2009. DHX also generates distribution revenue (20% of FY2009 revenue) from the initial licensing of television broadcast rights outside the territory in which a program was initially commissioned as well as the re-licensing of expired broadcast rights. Distribution revenue also includes broadcast rights on other platforms (DVD, video) and revenue generated on its feature films. DHX retains a back catalogue of approximately 2,400 half-hours of television programming across more than 60 individual titles from which it may generate distribution sales. Producer and service fee revenue (4% of FY2009 revenue) includes fees earned for the production of television programming for third parties who retain the copyrights.

Favorable Financing Model

In our view, the dynamics of DHX‟s business model are very attractive, especially as it expands its production library. DHX‟s proprietary production studios are located in Canada, which offers favorable federal and provincial tax credits, incentives, and a government-mandated and broadcaster financed private-public investment partnership to support domestic film and television production. Most of these subsidies have been in place for several decades, and are unlikely to go away anytime soon. DHX does not begin production on a new series/season until it obtains a contract from a domestic broadcaster agreeing to purchase exclusive (domestically) initial distribution rights for the series. These pre-production commissions, as well as international broadcast presales, further help to finance production. These funding sources are typically pledged to back interim production credit facilities in order to meet ongoing obligations during the production process. With this model, DHX as a rule directly finances no more than 15% of the production costs on a new program or series. Actual direct financing is believed to be much lower on average, and the most recent available data from the Canadian Film and Television Production Association indicates that Canadian film and television content producers directly financed only 3% of production financing in 2006/2007.

1 DHX also

minimizes risk by locking up the sale of the new program prior to commencing production. Especially in a stressed credit environment, the lack of reliance on private capital markedly reduces production financing risks. These favorable Canadian incentives afford DHX competitive advantages in terms of reduced cost and also make DHX an attractive partner for co-production and third party production agreements.

1 http://www.cftpa.ca/newsroom/pdf/profile/profile2008-english.pdf

Source: DHX media annual information form 2009, Page 11.

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Distribution Revenues and Scalability

DHX‟s programming catalogue also adds valuable higher-margin and long-term secondary distribution revenue streams. DHX typically maintains immediate international distribution rights on proprietary Canadian production and re-acquires Canadian rights once the initial licensing agreement expires (5 years on average). Of DHX‟s approximately 2,400 half-hour episode proprietary library, approximately 75% is children‟s programming and two-thirds of children‟s programming is animated. Children‟s programming (especially animated programming) is particularly exploitable for distribution: It is relatively culturally neutral and becomes dated less quickly than other programming, offering a longer distribution timeframe and global marketability. Animated content also lends itself to smoother dubbing. The local broadcaster typically bears any language translation costs, which limits DHX‟s operating expenses. Many governments also mandate a portion of television airtime be devoted to educational children‟s programming, thereby creating steadier demand.

DHX subsidiary Decode Enterprises‟ broadcast sales group has an extensive network of more than 200 broadcast customers throughout the world, and DHX has generated more than 1,300 separate television series distribution agreements between 1999 and 2009. DHX has described this catalogue as an „80/20‟ type of business, with 80% of distribution revenues generated from approximately 20% of the library. Although nearly all of the catalogue can still generate distribution agreements at some price, newer (and more popular) titles produce significantly higher licensing fees. Content distribution is a decaying enterprise, with new distribution contracts typically lasting 5 years and renegotiated after expiration. Distribution fees range wildly based on show popularity, geographical location, and age, but a rough estimate might be $50,000 on average per series for newer programming and as low as $5,000 or so for stale programming.

Annual distribution revenues had grown steadily until the setback in fiscal 2009 due to the extremely challenging economic environment. DHX still managed to generate $12.4 million in distribution-related revenues in 2009. Distribution gross margins are very attractive (54.4% in 2009) as production expenses are essentially non-existent. DHX‟s annual 200-300 half-hours of new programming production also creates a steady source of growth in the Company‟s back library that can be inexpensively leveraged across its pre-existing distribution network.

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Quarterly Production Output and Pricing

Direct Production Half-Hours Revenue/Half-Hour (C$Thousands)

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Recent Challenges

Depressed Production Commissioning

DHX‟s operating performance has been significantly impacted by the recent global recession as

broadcasters struggled amid tumbling advertising spending. Children‟s programming is generally less sensitive to drops in advertising dollars because it is usually played early and mid-morning rather than during prime time, and most of DHX‟s customer base have governmentally mandated minimum children‟s programming requirements. Nevertheless, broadcasters reduced their contracting of new children‟s programming during the downturn. Total production delivery has declined to 214.5 half-hours fiscal year to date (YTD) 3Q2010 versus 240.5 half-hours YTD 3Q2009. Licensing/commissioning fees have declined much more precipitously to an average of $98,300 per half-hour (excluding co-productions) YTD 3Q2010 versus $174,000 in fiscal 2009. As a result, proprietary production revenue is down approximately 60% YTD 3Q2010 (March 31, 2010) to $16.1 million versus fiscal 2009 record levels. Production revenue was also impacted by the absence of the popular drama series The Guard in 2010 versus 2009, as The Guard commanded premium fees (est. $300,000 per

episode) compared to children‟s programming.

While the recent production results are disappointing, investors may be overlooking the potential for imminent improvement in performance. We would note that there is typically a 12-18 month lag between the licensing of new television production and actual delivery. This has caused DHX‟s results to lag the broader market recovery to date. DHX management has also noted that, given the large declines in commissioning fees per episode over the past year, the Company has actually turned away some production offers. However, television advertising spending has shown signs of recovery from severely depressed levels, with analysts predicting this year‟s kids‟ network programming upfront advertising sales will be up 5% to 10% versus 2009 in the US.

2 DHX has described its normalized production fee target as $100,000 to $200,000 per episode, with

expectations that 2010 levels will prove to be an outlier. In our valuation, we conservatively assume total production revenue per half-hour remains below historical levels at $100,000 in 2011 and $125,000 in 2012.

The Company‟s pace of new production commissions has also begun to pick up. In May, DHX announced the commissioning of new seasons of the sketch teen/tween comedy show That’s So Weird! Most recently on June 7, 2010, DHX announced a second season (15 episodes) of the children‟s series Super WHY! (co-produced with Out of the Blue Enterprises, led by a creator of the popular children‟s series Blue’s Clues) has been co-commissioned by CBC in Canada and PBS Kids in the US. As new production commission announcements continue to roll in, a strong recovery in production revenue beyond 2011 looks increasingly likely.

Producer and Service Fee Growth

Although still a relatively small portion of Company revenues, it is worth noting that producer and service fees have increased significantly in 2010. Producer and service fees are $3.8 million YTD 3Q2010 versus only $2.7 million in all of fiscal 2009, and management has guided for $1.5 to $3.0 million in further producer and service fees during 4Q2010 (we estimate $1.8 million). Many content producers/broadcasters have faced difficulty obtaining production financing given the difficult credit markets of late, while DHX‟s capital-light financing model as well as its extensive global distribution network have allowed it to pick up substantial new co-production business.

Licensing and Merchandising Potential

Merchandising and licensing (“M&L”) is another revenue stream that DHX has the potential to expand appreciably. In the animated children‟s television business, royalties from the merchandising and licensing of products represent a huge payday if a series can develop into a popular hit. While a master toy license is typically the primary revenue stream (~50%), books, clothing and apparel, puzzles, linens, music, etc. can all

2 http://adage.com/upfront2010/article?article_id=144277

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provide significant incremental high-margin revenue. As illustrated in the table below, hit series have produced annual retail sales from US$100 million to as much as US$8 billion.

Children's Character Merchandise & License Sales

Property Est. Annual Sales (US$)

Sales Type Timeframe

SpongeBob SquarePants

$8b Retail 2009

Transformers (Hasbro) $600mm Wholesale 2009

Strawberry Shortcake $540mm Retail 2003-2007

Thomas the Tank Engine

$47mm Royalties 2005

Dora the Explorer $360mm Retail 2000-2009

Rugrats $100mm Retail 2000-2009

Blue's Clues $100mm Retail 2000-2009

Source: Cormark Securities; Union Securities; brandchannel.com; DHX presentation

Of course, the real challenge is establishing a mass popular character. DHX certainly does not currently have a Barney or Bob the Builder type character in its portfolio, and our primary investment rationale (and our valuation) assume DHX does not generate an M&L „hit‟. However, it is worth reviewing the possible upside if DHX does create a hit. The Company created a dedicated M&L division several years ago and has made a modest break into the market thus far. DHX generated $0.8 million in music and royalty (which includes M&L) revenues in 2009 and $1.4 million YTD 3Q2010. Even at these modest levels, music and royalty gross margins were 53.3% in 2009 and 83.9% YTD 3Q2010. DHX has come within striking distance of a hit, particularly with its Franny’s Feet preschool series. Franny’s Feet debuted in 2006 and has produced three seasons and a distribution agreement on the widely viewed PBS network in the US. The show resulted in an agreement with leading toymaker Hasbro Inc. to license Franny’s Feet intellectual property. However, the show failed to create enough buzz to generate significant product sales potential. Hasbro canceled the licensing and paid DHX the remaining $740,000 on its minimum guarantee (est. ~$1.5 million) in 4Q2009.

Animal Mechanicals: Next Shot at a Hit

DHX is currently pushing its animated preschool series „Animal Mechanicals‟ hard in hopes of generating an M&L „hit‟. The series is now in its third season on CBC in Canada, where it has drawn large ratings in the prime (for children‟s programming) early morning timeslots. Animal Mechanicals also has already proven popular internationally, garnering distribution agreements covering more than 100 countries. The Company appears to have learned its lesson from the failed Franny’s Feet toy deal as well. Whereas Franny’s Feet didn‟t easily lend itself to toy sales, Animal Mechanicals features transforming animals in a “snap-together-take-apart” world. We have to applaud the Company for keeping the toy market in mind this time—even if being subtle was apparently not of interest.

In May 2010, the Company announced it had reached a distribution agreement for Animal Mechanicals in the key US market. The show will be featured on The Hub, a new 50-50 joint venture between Discovery Communications and Hasbro Inc. that will replace the Discovery Kids channel upon launch in October 2010. Realistically, Discovery Kids/The Hub is not currently a premier outlet to generate a hit in the US. Disney Channel, Cartoon Network, Nickelodeon, and the major broadcast channels‟ (NBC, ABC, CBS, and PBS) weekend morning timeslots offer broader viewership and have a proven history of generating hits. However, the remodeled Hub channel may prove to be more successful than its predecessor. Hasbro CEO Brian Goldman recently expressed, “the feedback from consumers…and advertising agencies and potential

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advertisers to The Hub network has all been very positive.”3 The Hub will be broadcast in over 60 million

households, and Hasbro‟s participation in the channel means that program promotion and merchandising efforts should be closely aligned. While full terms of the Animal Mechanicals/The Hub distribution agreement have not yet been disclosed, we suspect the fees are favorable given the success that Discovery has already experienced on its international channels with Animal Mechanicals.

We stress that DHX shares appear cheap even without factoring in a major hit. We view the possibility of a hit M&L deal as a free out-of-the-money call option on DHX, with a low probability of success but a potentially high reward. While our outlook on Animal Mechanicals producing a huge M&L hit is cautious (not included in our calculation of intrinsic value), we would not be surprised to see the Company sign a licensing agreement within the next year or two—if not sooner. As a co-owner of The Hub and toymaker of the massive hit Transformers (whose toys have parallels with Animal Mechanicals), Hasbro looks like a natural partner in our view. While in our opinion the most likely outcome is another minimum-guarantee payout like the Franny’s Feet deal, it is worth noting the potential payoff if Animal Mechanicals does become a hit on The Hub. A back-of-the-envelope analysis suggests a mid-level M&L hit could easily double DHX‟s earning potential. Licensing contracts with consumer products licensees typically earn royalties at 8% to 15% of wholesale revenues including a minimum guarantee. Such licensing requires little operating cost to the content producer and offers extremely high margin potential. For example, assuming 65% pretax margins and a 30% tax rate, a 10% royalty contract could produce annual net income of $4.6 million if annual wholesale revenues were $100 million.

Potential Annual Animal Mechanicals Royalty Net Income

Wholesale Sales (C$ millions)

Ro

ya

lty

Ra

te $10 $25 $50 $100 $150 $250 500

5.0% $0.2 $0.6 $1.1 $2.3 $3.4 $5.7 $11.4

7.5% $0.3 $0.9 $1.7 $3.4 $5.1 $8.5 $17.1

10.0% $0.5 $1.1 $2.3 $4.6 $6.8 $11.4 $22.8

12.5% $0.6 $1.4 $2.8 $5.7 $8.5 $14.2 $28.4

15.0% $0.7 $1.7 $3.4 $6.8 $10.2 $17.1 $34.1

Assumes 65% pretax margins, 30% tax rate

Balance Sheet and Capital Raises

DHX‟s balance sheet looks very healthy, with only $3.3 million in long term debt (primarily a $2.5 million mortgage on a production studio with stated net book value of $4.5 million). Production costs are financed by various revolving facilities backed by broadcast licensing contracts receivable and government tax credits ($34.9 million in interim production financing at 3Q2010). Thanks to the security of these backing assets, DHX pays a reasonable prime plus 0.5% - 2.0% on these facilities.

DHX has also built up an approximately $26 million net cash position with two recent equity raises. DHX raised approximately $1.5 million through the private placement of 1.875 million shares with Sprott Asset Management in January 2010. Sprott Asset Management is run by Eric Sprott, a well known Canadian portfolio manager with a popular investment newsletter and a significant media presence. Given his track record of uncovering undervalued micro-cap stocks, we view his stake in DHX as a noteworthy vote of confidence. In our view Sprott cut an extremely favorable deal on the private placement, paying $0.80 per share and also receiving ½ warrant per share ($1.15 exercise price, expiring January 26, 2012, totaling 937,500 shares). This possibly served as a beachhead for Sprott participating in a later (and much pricier) capital raise. DHX completed the issuance of 14.6 million common shares (including the full exercise of 1.9 million shares of over-

3 Wall Street Journal, “Hasbro Earnings Soar on Strong Sales.” 19 April 2010.

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allotment options by the underwriters) at $1.30 per share on April 15, 2010. After fees, net proceeds were approximately $17.5 million. It appears Sprott participated heavily as a buyer in this deal; on April 30, 2010, he declared ownership of approximately 17.5% of outstanding DHX shares in stock (10.0 million shares) and warrants.

Capital Deployment Opportunities

With the recent capital raises, DHX is positioning itself to take advantage of depressed market valuations via acquisitions. DHX now has an estimated $26 million net cash position (excluding interim production financing), which at approximately $0.41 per diluted share represents 40% of its current market capitalization. The Company has a somewhat mixed history of acquisitions, although in our view the largest acquisition of Decode Entertainment (for an estimated $17.8 million in early 2006) has been a success. Decode studios generated $17.0 million in production sales in 2009 alone, and its distribution network has added significant value as well. More recently, DHX acquired Studio B Productions in December 2007 for $9.4 million including a $1.4 million earn-out. Although Studio B‟s production output has been weak of late (only $1.1 million in production revenue YTD 4Q2010), the deal was structured at a reasonable 4.5x multiple to Studio B‟s average 2007-2008 EBITDA.

Given it now has three Canadian production studios and new production commissioning remains soft, we would not expect to see management acquire another studio. Alternatives include purchasing the rights to a production back library and acquiring another distribution network. In our view, a large library acquisition with no studio or overhead costs may be the most attractive option. With DHX‟s large network of international distribution agreements in place, the acquisition has the potential to be value-added in terms of distribution sales synergies. Finding a deal at the right price may be possible, as companies or private equity firms that overextended themselves during the credit bubble may be looking to sell.

Another possibility is acquiring a DVD distribution business. DHX concedes that its exploitation of the DVD market has been awful to date. The Company lacks distribution capabilities, and while it has made a few minor third party distribution deals, these are typically very low margin for the licensor. Although the DVD sales potential on most of the Company‟s back library may be scant, DHX suggested DVD distribution could still generate somewhere in the neighborhood of $500,000 or more in annual cash flow. We could see the Company acquiring and integrating distribution capabilities at some point (particularly if it produces a hit series with significant DVD sales potential). While the DVD appears to be a fading technology, children‟s TV programming may still have some DVD staying power and it could be an attractive business for DHX at the right price.

While share buyback looks unlikely in the nearer term given the large recent equity issuance (as profitable as issuing shares at $1.30 and repurchasing them at $0.90 would be), it would not be shocking to see DHX start repurchasing shares hand-over-fist a year or so from now if shares continue to trade near or south of $1.00. The Company announced a share repurchase plan for up to 10% of its public float (equating to 2.84 million shares) in March 2009 while shares were trading near $0.60 per share. Although the Company ultimately purchased only 261,000 shares, DHX looks better positioned to authorize and complete a similarly large buyback plan now given its stronger capital position and an improving economic outlook.

Consolidating Industry: Acquisition Potential

While still fairly small and competitive, the children‟s television production industry has undergone significant consolidation over the past decade or so. In our view, this trend should continue. In fact, several firms (notably Entertainment One and private equity firm Apax Partners‟ HIT Entertainment) have publicly expressed their interest in dealmaking over the past year or so. DHX offers several attractive characteristics to a potential acquirer. As the old content distribution channels dry up and are replaced by new media (video on demand, mobile, etc.), content production could arguably become a more valuable business. DHX‟s Canadian studios offer low cost production bases with their government subsidies, which is particularly valuable in the current competitive production environment. The Company‟s Canadian subsidies (some of which require Canadians account for a majority of shareholders) should be secured in case of a foreign takeover by a DHX

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clause that automatically issues non-economic voting shares to the Board if Canadian shareholders lose their majority status. While this could make it difficult for an acquirer to gain Board control without DHX management‟s cooperation, DHX seems amenable to an acquisition (having recommended Entertainment One‟s bid in September 2008) and could waive or transfer these shares. Canadian regulators‟ recent approval of Carl Icahn‟s bid for Lions Gate Film may also set a precedent for allowing Canadian subsidiaries of foreign-controlled companies to maintain governmental support. DHX‟s fairly extensive distribution network could also attract a company with an exploitable library. The Company‟s large net cash position would also make a levered acquisition that much easier to execute.

September 2008 Entertainment One Bid

In fact, DHX received a takeover bid from Canadian media (film, TV, music) distributor Entertainment One on September 29, 2008. The bid valued DHX at $1.59 per share ($68 million), representing an 87% takeover premium versus the pre-announcement close. As a content distributor facing dwindling sales in traditional CD and DVD media, Entertainment One‟s bid was motivated by the aforementioned attractiveness of acquiring proprietary production capabilities. The acquisition would have also provided a natural outlet for DHX to distribute its content on DVD. It is also worth noting the deal represented a healthy 10.6x enterprise value (excluding interim production financing) multiple to DHX‟s TTM EBITDA—and during a recessionary period no less, and not during the pre-recession LBO mania. However, the deal fell through as Entertainment One backed out on December 11, 2008. Financing difficulties associated with the potentially 25% cash-based purchase were ostensibly cited by Entertainment One, although strategic disagreements over the direction of the Company voiced by DHX management may have played a large role. While DHX shares now trade more than 40% below the proposed takeout price, we think there is still a strong case that shares can reach higher levels as an independent company.

Insider Ownership

While management is looser with their option granting activities than we would like, we are generally encouraged by the large insider ownership at DHX; it gives us greater confidence that management is willing and motivated to maximize shareholder value. Insiders own 23.5% of diluted shares in direct holdings alone, and 27.6% assuming the vesting and exercise of all outstanding options.

DHX Media Insider Ownership

Name Position Common Shares Held Options

(Common Shares) Total

(assuming full exercise)

Michael Donovan Chairman, CEO 7,007,027 40,000 7,047,027

Charles Bishop President of Production &

Development 1,291,178 400,000 1,691,178

Steven DeNure President and COO 1,934,235 435,000 2,369,235

Dana Landry CFO 205,849 512,500 718,349

Neil Court Director 1,934,235 40,000 1,974,235

Others 4,381,307 1,530,000 5,911,307

All Insiders 16,753,831 2,957,500 19,711,331

Percentage of Diluted Shares: 23.5% 4.1% 27.6% Source: sedi.ca

Valuation

At the current price level, DHX shares appear to be quite inexpensive even assuming a private market multiple well below the Entertainment One bid. Adjusting for the April capital raise, we estimate DHX currently

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trades at only a 6.5x EV/TTM EBITDA multiple, on what could prove to be trough EBITDA levels of $5.9 million. In our valuation, we conservatively assume production output and commission pricing increase modestly over the next two years to 260 half-hours and $125,000 per half hour in 2012—well below the 283.5 half-hours at $155,000 per half-hour in 2009. We also assume Company-wide revenue improves relatively slowly to $47.8 million in 2011 and $61.9 million in 2012; while analyst coverage is relatively scant (four sell-side Canadian firms), estimates for 2011 revenues range from $52-$61 million. If gross margins improve modestly to 38% by 2012 from current 37% levels (easily achievable if production commission pricing improves) and SG&A expense increases to $14.5 million from an estimated $11.6 million in 2010 (versus a 13.5% decline in SG&A YTD 3Q2010), DHX could record $8.9 million in EBITDA in 2012. This would still be significantly below peak EBITDA of $9.8 million in 2009. Even a large discount to the Entertainment One bid‟s 10.6x EV/EBITDA multiple implies large appreciation potential for DHX. Using an 8x multiple to 2012E EBITDA, we derive an intrinsic value of $1.39 per share for DHX—implying approximately 54% upside from current levels.

DHX Media: Standard Valuation

C$ Millions

Enterprise Value @8x 2012E EBITDA C$71.3

plus 2012E Net Cash C$28.5

Equity Value C$99.8

2012E Diluted Shares Outstanding 72.0

Estimated Intrinsic Value Per Share C$1.39

Current Price C$0.90

Implied upside to intrinsic value 54.0%

Library Private Market Value

An alternative method of assessing DHX‟s private market value would be to place a value on the Company‟s production library. As illustrated in the table below, historical acquisitions in the children‟s production industry have varied wildly on a per-episode valuation depending on the popularity of series in a company‟s library. For example, the acquisition of HIT Entertainment (which owns the distribution rights to Barney, Bob the Builder, and Thomas and Friends) by private equity partners in 2005 valued HIT‟s library at £326,000 per half-hour episode. At the low end, DHX acquired the rights to 520 half-hours of programming (primarily the first 12 seasons of the Canadian comedy series This Hour Has 22 Minutes) for only C$4,200 per episode. However, this was primarily older, lower distribution fee generating content than most of the rest of DHX‟s library.

Historical Children's Production Company Acquisitions: Library Valuations

Date Target Acquirer Price

Target Library

Half-Hours

Valuation/ Half-Hour

(thousands)

Sep-00 Nelvana Corus Entertainment C$554 1,450 C$382

May-05 HIT Entertainment Apax Partners £494.4 1,500 £326

Dec-06 Classic Media Entertainment Rights US$210 3,500 US$60

Dec-06 Private rights holders DHX Media C$2.2 520 C$4.2

Dec-07 Studio B Productions DHX Media C$9.4 400 C$23.5

Jun-08 DIC Entertainment Cookie Jar US$87.6 3,000 US$29

Jul-08 ImX Communications DHX Media C$0.90 26 C$35

DHX Media Ltd.

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M I C R O C A P

Placing a modest $30,000 per half-hour value on DHX‟s library implies a $72 million value for the catalogue. Adding in the Company‟s estimated fiscal year-end 2010 net cash position, we estimate DHX is currently worth $1.36 per share based on its library alone—confirming our standard EV/EBITDA valuation. It is also worth noting this library-based valuation gives no added value to DHX‟s three Canadian production studios, which provide a continual flow of new distributable (and higher fee-extracting) content each year in addition to the production commissioning income. This valuation also gives essentially no credit for a hit merchandising and licensing agreement, which is certainly within the realm of possibilities.

DHX Media: Library-based Valuation

C$ Thousands

Production Library (Half-Hours) 2,400

Value per Half-Hour C$30

Library Value C$72,000

Plus 2010E Net Cash C$24,897

Equity Value C$96,897

2010E Shares Outstanding 71,439

Estimated Intrinsic Value per Share C$1.36

Conclusion

While DHX Media has been severely impacted by the recent recession and a historically sharp decline in advertising spending, we believe production contracting is beginning to pick up and investors are overlooking the attractiveness of DHX‟s business model. To recap, DHX offers the following advantages:

Canadian-based production studios that receive large governmental subsidies

Financing model requiring no more than 15% direct contribution to production budgets

Licensing/commissioning contract guarantees before studio production begins

Extensive distribution network capable of adding value and scale to an acquired library

$29.0 million in cash and only $3.3 million in long-term debt

23.5% direct insider ownership provides strong management incentive to realize shareholder value

Given the aforementioned advantages and the continued trend of consolidation in the children‟s content industry, we would also not be surprised to see DHX become a takeover target again. At only a 6.5x EV/EBITDA multiple, in our view DHX shares currently trade well below their private market value. Again, our valuation does not take into account the possibility that Animal Mechanicals (or another show) becomes a merchandise and licensing hit. If that were to happen, however, it would be a transformational event for the Company given its market capitalization. In short, we view DHX as a significantly undervalued business as-is, and a recovery in production volume and pricing over the next 12-18 months should be a catalyst for share appreciation. In the meantime, investors could potentially benefit from a hit Animal Mechanicals licensing deal or another takeover attempt.

DHX Media Ltd.

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M I C R O C A P

Risks:

Risks that DHX Media may not achieve our estimate of the Company‟s intrinsic value include, but are not limited to, continued economic weakness and falling advertising dollars; reduced new programming demand from broadcasters; failure to produce popular programming; and changes in governmental incentive programs.

Analyst Certification:

Asset Analysis Focus certifies that the views expressed in this report accurately reflect the personal views of our analysts about the subject securities and issuers mentioned. We also certify that no part of our analysts‟ compensation was, is, or will be, directly or indirectly, related to the specific views expressed in this report.

DHX Media Ltd.

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M I C R O C A P

DHX Media Ltd. Consolidated Condensed Balance Sheets

(C$ in thousands)

ASSETS Mar. 31, 2010 (Unaudited)

Jun. 30, 2009 (Unaudited)

Current assets:

Cash and cash equivalents $ 11,504 $ 10,806 Short-term equivalents - 272 Amounts receivable 54,562 72,466 Prepaid expenses and deposits 969 429 Current portion of investment in film and television programs 11,211 19,979

78,246 103,952

Investment in film and television programs 18,391 15,848 Restricted cash - 8 Investment in production companies 1,476 2,472 Assets related to discontinued operations - 6 Property, plant, and equipment 7,602 8,243 Long-term investment 2,042 2,042 Intangible assets 4,337 5,144 Goodwill 11,088 11,088

TOTAL ASSETS $ 123,182 $ 148,803

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Bank indebtedness $ 3,088 $ 2,750 Accounts payable and accrued liabilities 13,028 15,476 Deferred revenue 5,324 10,108 Liabilities related to discontinued operations - 19 Interim production financing 34,917 53,793 Current portion of long-term debt and obligations under capital leases 567 635 Other liability 25 675 56,949 83,456 Long-term debt and obligations under capital leases 2,758 3,164 Future income taxes 1,272 1,416 Non-controlling interest - 217 60,979 88,253 Shareholders‟ equity:

Share capital and contributed surplus 64,113 61,725 Deficit (1,910) (1,175)

62,203 60,550

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 123,182 $ 148,803