European exhibition has seen an influx of private equity in recent years. But can more profits be squeezed out of Europe's saturated cinema market, asks Richard Brass. Navigate links (right) to see the state of play in leading territories.

When Cineworld floated on the London Stock Exchange at the end of April, the rest of the cinema exhibition industry was watching very closely.

Some observers were no doubt curious to see whether the floatation, originally planned for last year but then pulled when the markets wobbled, would crash and burn. But most of Cineworld's rivals watched intently because it is a route many of them could choose to follow.

For several years the only financial story in cinema exhibition has been the private-equity invasion. After protracted and expensive expansion in the 1990s, the past few years has seen consolidation among the cinema exhibitors - particularly in the UK. In 2004, Blackstone bought Cineworld and UGC, and in 2005 Odeon and UCI were bought by Terra Firma.

But a shift away from private equity is well underway in the US, a country usually ahead of Europe in film industry developments. In April, the private-equity owners of the leading US cinema chain, Cinemark, floated the company on the stock market. Last month, AMC's private-equity owners did the same.

There is now a sense across Europe that a new phase is beginning and that a re-invigorated exhibition industry, transformed by the effect of venture capital, may be about to emerge with strong prospects and plenty of new ideas.

Cineworld's investors seem to believe it, at least. The flotation was three times oversubscribed, the company's shares opened at 170p and rose to 193p by lunchtime on the first day, and they are now bouncing along at 217p.

In an industry that has long been mentioned alongside words such as 'sunset' and 'doomed' as new forms of entertainment technology have sprung up, such a positive response may have come as a surprise. But not to Cineworld chief executive Steve Wiener, who says rumours of the industry's demise have been greatly exaggerated.

'I've heard it before, starting about 30 years ago,' he says. 'Everyone keeps saying the business is under threat, but every time new technological advances take place, it seems to whet the public's appetite more for movies, which means more good movies get made.'

Even so, finding new growth in a cinema market as saturated as that of Western Europe presents a challenge for film exhibitors. In other parts of the world, such as Eastern Europe, the market is expanding rapidly and the industry can scarcely build multiplexes fast enough. But in the West, growth will have to come from somewhere else if investors are to be kept interested.

For Tim Richards, chief executive of Vue Entertainment, that is where digital comes in. He believes it offers the exhibition business the greatest opportunities it has had for 40 or 50 years.

'What digital and 3D is going to bring in the future is a major point of differentiation for the customer,' he says. 'The fact that every major director and producer in Hollywood is now working on 3D movies speaks for itself. You have Steven Spielberg and Peter Jackson, who are doing the Tintin series, George Lucas converting the old Star Wars movies, and James Cameron. The list goes on and on, and it's a huge endorsement for the future of the industry.'

The experience of private-equity control has been crucial in preparing the industry to make the most of this opportunity, Richards says. Last June he led a $692m (£350m) buyout of the private-equity backers with whom he bought Warner Village in 2003, and he believes private-equity involvement has been very good for the industry.

'There was a period of time, both in the US market and internationally, particularly in the UK, when you had a lot of building that could be characterised as ego building - building against other people for no other reason than to prove a point,' he says.

'Private equity has brought a discipline to the industry that was well needed. It has rationalised, improved and enhanced the business, so it's now much more efficient than it ever has been, and is really in a position to capitalise on the opportunities from digital.'

Cineworld's Wiener says the involvement of private equity has provided a range of advantages, beginning with the economies of scale that come with hooking up with another company in the same business.

'In our case - Cineworld and UGC with Blackstone - and Odeon and UCI with Terra Firma, it enabled us to have much better buying power, and to implement things that probably would otherwise have taken years longer because we wouldn't have had the resources.

'Blackstone also thinks outside the box all the time, so they come up with ideas and say, 'Have you ever tried this'' It's really great to sit and talk with people who are constantly looking to help you improve your business.'

Karsten Grummitt of Dodona Research says the way private-equity firms have dealt with their cinemas has come as something of a surprise, defying expectations of the classic model of buying in, stripping down and selling off.

'They've been good in many ways. They've pointed out to cinemas that their customers are people who like cinema, and changed things accordingly, doing deals with Lovefilm and things like that. They've looked at where a very traditional industry sits in the larger scheme of things.'

And while many observers believe further flotations are very likely, Wiener thinks it does not necessarily mean private-equity firms will drop their loads and walk away, because acquisitions mean they are now very different entities.

'When you look at companies like Blackstone, they're big players in the entertainment industry, with Madame Tussauds and the Merlin Group and the London Eye. All these things fit in naturally. I don't see private-equity houses holding large shares in the long term, but I do see them holding shares.' He speaks from experience, as Blackstone still holds 53% of Cineworld, down from 90% before the float.

As for the growth to justify that investment, Wiener too is placing his faith in the digital future. 'Over the next couple of years, growth is going to continue to come from good movies. Then you're going to see larger percentages of it coming from alternative product, and screen advertising's going to improve, because of the possibilities with digital, which will make it cheaper and more flexible.

'Also, once digital's in place, the library of films that becomes available will leap. The only thing stopping it now is that there aren't enough digital screens around the world yet.'

There are signs, however, that not all exhibitors are as confident about the shining prospects of digital. Last September, one of the families that founded Belgium's highly successful Kinepolis chain, the Claeys, sold out, leaving the Bert family as the biggest shareholder with just over 40%.

Grummitt says: 'They've looked at this digital distribution coming towards them, and the Claeys have said, 'Uh-oh, we're doomed, it's time to get out,' but the Berts have said, 'We can make this work.' I think that's a measure of the uncertainty that exists.'

In the medium term, however, Grummitt believes digital will benefit the exhibitors and their investors.

'When a lot of screens were built, what became scarce was the print to put on them. But with digital distribution, prints can't be scarce any more. It will allow exhibitors to wrest some control of their business back from Fox, Warner, UIP, Buena Vista and all of those people.'