Yesterday, I considered several reasons why Giancarlo Stanton’s new contract wasn’t folly on the part of the Marlins, but that was before the details of the mega-deal were announced. As it turns out, Stanton’s extension is heavily back loaded, making the new contract even more team friendly than first anticipated.
Annual Breakdown of Giancarlo Stanton Contract
Note: Excludes potential for $1 million in award-based bonuses each season.
Source: Cots contracts
Stanton’s new deal was first reported as 13-years and $325 million, but that includes a $10 million buyout of a $25 million option in 2028. So, if the Marlins pick up the option, the average annual value (AAV) would end up being $24.3 million. However, that’s only a small consideration. What significantly lessens the Marlins’ financial burden is the payment structure, which concentrates payment in the second half of the contract. This is important for a few reasons, including the impact it has on Stanton’s opt out after year-six. If the right fielder decides to test free agency at that time, the Marlins would likely have enjoyed his prime years for a paltry $107 million dollars, or less than one-third of the total contract value. If this transpired, the Marlins could end up with an incredible bargain, but what if they want the slugger to stay? Because of the back-loading, the incentive for Stanton to flee would be lessened considerably. Instead of aiming to surpass an AAV of $25 million in order to breakeven, Stanton’s hypothetical foray back into free agency would need to net at least a seven-year deal worth approximately $31 million per season. Considering salary inflation in major league baseball, that’s not beyond the realm of possibility, but it certainly raises the bar.
The impact of back-loading on Stanton’s opt out is only half the story. By structuring the deal in such a manner, the Marlins will also enjoy more tangible financial benefits. Although pundits like to refer to large contract values as one lump sum payment, the transfers of cash are periodic. This is important because money has time value (i.e., a dollar is worth more today than in the future in the absence of deflation). As a result, the present value of any long-term series of payments is less than the stated amount. So, by pushing the largest payments to a later date, the Marlins have increased the level of benefit they’ll accrue (see here for a PV analysis using a straight-line approach). The chart below illustrates this savings by adjusting each year’s payments by an average CPI and MLB salary inflation rate, in each case using assumptions that are less favorable to the team to avoid overstating the impact.
Inflation Adjusted Present Value of Giancarlo Stanton Contract
Note: Adjustments based on average CPI rate of 2.4% from 1994 to 2013 and average player salary growth rate of 4.3% between 2003 and 2013. Assumes full payment made on January 1 of each year, with the inflation rate compounded once. Present Value is as of the January 1, 2015.
Source: timevalue.com, espn.com, Cots contracts, inflationdata.com
Over the 13 years of the contract, Stanton will earn about $21 million in real dollars and the equivalent of $18.6 million based on forecast increases in the average MLB salary. However, the benefit doesn’t stop there. Because the Marlins do not have to pay Stanton higher sums up front, they’ll have the opportunity to use the difference for other purposes. The expanded chart below shows what would happen if Miami invested each year’s surplus at a very modest rate of 3%. Over the 13 years of the deal, the team would be able to generate almost $15 million in income (essentially wiping out the difference between the buyout fee and 2028 option value). Although the team is unlikely to actually invest this money in a segregated account, it’s possible that they could put the extra cash flow to good business use, thereby generating an even more attractive return on investment. Granted, they could also waste the surplus, but had the contract been structured on a straight-line basis, they wouldn’t have the option.
Investment Potential of Back Loading Giancarlo Stanton Contract
Note: Adjustments based on average CPI rate of 2.4% from 1994 to 2013 and average player salary growth rate of 4.3% between 2003 and 2013. Assumes full payment made on January 1 of each year, with the inflation rate compounded once. Present Value is as of the January 1, 2015.
Note: Interest income based on assumed 3% rate of return, compounded monthly, with surplus investment made on January 1 of each year until buyout is paid at end of 2027.
Source: timevalue.com, moneychimp.com, espn.com, Cots contracts, inflationdata.com
Long-term financial arrangements have significant risks, but they also offer the potential for great reward. The Marlins have clearly made a considerable commitment to Stanton, but the All Star right fielder’s talent seems to justify the leap of faith. Add in the risk mitigation resulting from a favorable contract structure and it’s hard to question the wisdom of the deal. That doesn’t mean everything will go according to plan, but, at the very least, the Marlins have put themselves in position to reap the benefits of having a very special player for many years to come.
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