Entertainment One has pulled the plug on its $68-million reverse takeover of DHX Media for lack of consent from its senior lenders.

E1, which is based in the Cayman Islands and maintains a corporate headquarters in Toronto, said it will instead pursue a Toronto Stock Exchange listing on its own in its current fiscal year, with the backing of its boardroom.

Shares in E1 on Thursday fell by 23% to 25 pence on London’s AIM Exchange on news of the collapsed merger talks.

E1 first announced its merger with Halifax-based DHX, run by founder Michael Donovan, in late September, just as the implosion of global financial markets gathered pace.

That deal was supposed to close by Jan. 31, 2009, but became questionable when E1’s senior lenders sought to renegotiate the original terms and timetable. The original transaction called for E1 to acquire all outstanding DHX stock at $1.59 per share, with E1 shareholders to receive one common share of DHX for each Entertainment One share held.

DHX shareholders were in turn to be offered either 0.9409 common shares of DHX for each existing DHX share held, or $0.3975 in cash and 0.7057 newly issued common shares of DHX for each existing DHX share held.

According to DHX, the sticking point with E1’s lenders was providing DHX shareholders with the option to receive cash as partial payment for their common shares.

Stock in DHX has fallen to the $0.45 range since the reverse takeover deal was first unveiled in late September.

The consent of the senior lenders was essential to E1 completing the reverse takeover. The company’s biggest shareholder is Marwyn Investment Management, the British hedge fund that in March 2007 acquired E1 for $168 million, took it off the TSX as an income fund and refloated it on London’s AIM.

As negotiations between the two parties continued, DHX said no to granting E1 an extension past Jan. 31, 2009 to complete the deal, and to its new revised terms.

‘The company continues to work towards achieving a primary listing on the TSX in the current financial year,’ E1 CEO Darren Throop said Thursday in a statement.

E1 has coveted a TSX listing to secure access to North American capital markets.

The deal’s collapse also thwarts E1’s bid to add DHX’s kids programming properties, which include Decode Entertainment, Halifax Film and Studio B Productions, and its content library, to its stable of companies.

For DHX’s Donovan, the challenge will now be to assure a future for a profitable company which nevertheless sought scale in a tie-up with E1 to survive the current market turmoil.

The reverse takeover also helped DHX as its TSX stock tipped into penny stock territory, which in turn threatened to limit the company’s room for maneuver as a publicly traded company.

‘DHX Media continues to believe that the prospects for its business operations and its financial condition remain solid,’ the Halifax-based company said in a statement.

Like E1, DHX insisted it has sufficient working capital to weather the current market downturn.

Also declared dead on Thursday was BCE’s $34.8-billion privatization after it failed to secure a favorable audit report before a Dec. 11 deadline. That failure led the Ontario Teachers’ Pension Plan and three U.S. private equity players that proposed to take BCE private to terminate the deal.