Stantec acquires engineering firm Morrison Hershfield, boosting its Canadian work force by 10%

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Engineering giant Stantec Inc. has acquired Morrison Hershfield, a Markham, Ont.-based firm with 22 offices across North America, boosting its Canadian work force by 1,150 employees and doubling its transportation presence in Ontario.

The deal marks the latest in a string of acquisitions for Stantec, which is following a long-term strategy of bolt-on buys to expand its employee base and expertise. It also fits in with a broader trend of consolidation within the engineering and construction industry, as large global firms fight to increase their scale and jump into new markets.

But the company is not making acquisitions just for the sake of getting bigger, said Gord Johnston, Stantec’s president and chief executive officer, in an interview Tuesday. Instead, the company is focused on adding employees to increase its range in new and growing industries, such as data centres and lithium batteries.

The companies did not disclose the financial terms of the deal. The acquisition is subject to various court and regulatory approvals.

“We turn away 95 per cent of the opportunities that are presented to us,” said Mr. Johnston. “We’re not looking for a lot of costs synergy. What we’re really looking for is revenue synergy, and we absolutely have it with Morrison Hershfield.”

Nonetheless, Mr. Johnston says he expects a number of larger targets to come on the market in the next year, and highlighted the potential for U.S. acquisitions given the fragmented nature of the American engineering industry. Stantec has the potential to double in size in the U.S., in the UK and in Australia and New Zealand, he said.

Meanwhile, competition from private equity buyers for mergers and acquisitions has slackened amid higher interest rates, Mr. Johnston said. “We’re talking to firms around the world right now. The pipeline of potential firms has never been this full.”

In notes to investors Tuesday morning, Royal Bank of Canada Dominion Securities Inc. analyst Sabahat Khan estimated Stantec had paid between $250-million and $300-million for Morrison Hershfield, based on an earnings measure, and Scotiabank analyst Michael Doumet estimated the company paid about $270-million.

“We estimate Stantec can debt-fund M&A in excess of $1-billion in the [next twelve months] without exceeding upper end of its leverage target,” said Mr. Doumet.

Morrison Hershfield is an employee-owned engineering and management consulting firm founded in 1946, operating in Canada, the United States and India. With roots in the postwar building boom, the firm has grown to offer a range of services in the transport, telecommunications and environmental sectors, with frequent work on highways, tunnels and bridges.

The acquisition will expand Stantec’s presence in most Canadian markets, increasing its domestic employee count by approximately 10 per cent, while further strengthening its work force in the U.S., the company said in a release Tuesday morning. Stantec employs about 28,000 people around the world.

Last December, the company introduced a new three-year strategic plan, including growing net revenue to $7.5-billion by 2026. Part of the plan involves improving profitability per employee, which Stantec says it will achieve in part through new uses of artificial intelligence.

Mr. Johnston says the company is starting to use AI to produce project proposals, drawing from a library of the company’s past successes. That could reduce the initial drafting process from one or two days to a few minutes.

“AI will help us reducing administrative and marketing costs,” Mr. Johnston said. “In my view, it will never replace the engineer or the technologist. I think it will make us more efficient.”

The company also plans to reduce use of subconsultants by 5 to 10 per cent, and reduce its office square footage by a further 10 per cent on top of the 30 per cent it dropped early in the COVID-19 pandemic.

The acquisition marks a major expansion of Stantec’s Ontario transportation team just as the province is proposing to build Highway 413, a 52-kilometre roadway in the Greater Toronto Area, and extend several other highways. The company is also adding staff in Western Canada, where bridge and roadway work remains robust, the company said.

The acquisition will complement Stantec’s recent acquisition of U.S.-based Environmental Systems Design Inc. as well, a design firm that specializes in data centres, Stantec said.

Currently, Morrison Hershfield is the engineer of record for Project NexStar, Canada’s first lithium-ion EV battery manufacturing facility in Windsor, Ont.

“We’ve been working together with Morrison Hershfield for decades. We know the leadership team really well, and we know the level of technical expertise throughout the organization. The cultural fit is there,” Mr. Johnston said.

While Stantec could be affected by infrastructure spending pullbacks in a recession, investors are encouraged by the company’s expansion. The company’s stock price on the Toronto Stock Exchange rose 64 per cent in 2023, and on Tuesday morning, it surged past its previous all-time high of $106.47 per share.

In November, Stantec raised $288-million in a share offering, and said it would use the funds to repay existing loans and support future acquisitions.

In its third quarter ended Sept. 30, 2023, Stantec posted net revenue of $1.3-billion, an increase of 13.5 per cent over the same quarter in 2022.

On Monday, Stantec also finalized the purchase of its last acquisition of 2023: Zetcon Engineering, a 645-person engineering firm headquartered in Bochum, Germany.