Tuesday, April 2, 2019

Ronald Acuna gets $100M contract, and it's a great deal for everybody

The Braves just signed Ronald Acuna to a $100M, 8-year deal. I personally think it's a fantastic financial decision by both parties, as it removes a lot of risk for Acuna, and it provides favorable cash flow for the Atlanta Braves.

WHY IT'S A GOOD DEAL FOR THE BRAVES:

The Braves get Ronald Acuna for the next 8 years, and assuming he plays well in those 8 years, they will get one of the better young outfielders in the prime of his playing years for the price of $12.5M per year. This number puts him in the top 20 of current outfielder salaries, but over time as inflation increases, the Braves are hedging against those escalating outfielder contracts.

For example, if the best outfielders are nearing $30M a year in 2019, what will they be making in 2027 when the Ronald Acuna deal expires? My guess is, based on what we know from 2011 when the best outfielders were making close to $20M, you could see salaries north of $40M when Acuna comes up for his next deal at Age 28.

Also Acuna produced a 3.7 WAR according to Fangraphs last season in 2018. Considering an MLB average is around $5-6M per 1 point of WAR, If Acuna can average 2 WAR or better every year, this deal will make a lot of sense for the Braves.

WHY IT'S A GOOD DEAL FOR RONALD ACUNA:

Currently Acuna is scheduled to make just under $600k per year for the next couple of years, and then become arbitration eligible for the next 3 years. Let's say that he does well and earns a large number in arbitration over those years and averages $15M per year. What does the math tell us about holding out versus signing this deal today?

Well for starters, Acuna gets $25M in two years instead of $1.2M, which is a $23.8M difference. That's assuming this $100M is even across the whole contract which it may not be. Now let's assume over the next 3 years he would have made $15M, but instead makes $12.5 per year. That means he loses $7.5M in possible money, but he gained $23.8 on the front end.

Total difference to Acuna: $16.3M, with no time value of money (I don't want to complicate things further for baseball readers with present value calculations and expected returns.)

Now let's really fictionalize and let's say he signs the Bryce Harper style deal when he came out of arbitration, $26M a year.

We're 5 years into Acuna's career when he's out of arbitration. So we're comparing the last 3 years of the current deal that Acuna signed, which takes us up to the total of 8 years he's under contract, versus 3 years of a fictional contract he could have signed at full value coming off arbitration.

The difference is $26M a year x 3 years, versus $12.5M a year 3 years. A total $78M versus $37.5M, or in other words, Acuna loses out on a possible $40.5M on the back end of his possible fictional contract.

Add the loss of $40.5M and the gain on the front end of $23.8M, and you'll see how Acuna is basically forgoing $16.7M of opportunity cost. In other words, Acuna might make $16.7M if he held out, if he played well enough to get a top-tier contract, and if he doesn't get hurt.

When you weigh approximately $17M extra versus the $100M guaranteed? It's a no-brainer to sign it now. After all $100M makes you filthy rich regardless. Why put $100M at risk for an additional 17% return over an 8 year period of time? That would be ridiculous from an investment standpoint and ridiculous from a baseball contract standpoint as well.

All in all, I think it's the perfect compromise for both sides. Everyone can breathe easy that Acuna is going to be a Braves for a long, long time.

GO BRAVES!

No comments:

Post a Comment