Sunday, 2 October 2016

Making (Dollars and) Cents of the Nikita Kucherov Contract Negotiation

I wrote earlier in the week about the Tampa Bay Lightning's unenviable situation with restricted free agent Nikita Kucherov.  In short, he's not showing up until he has signed on the dotted line.  The big question, though, is what the contract above that dotted line might look like.  There's been a lot of talk of long-term deals and big money contracts, but one under-discussed option is that of a bridge deal; the idea was first floated to the masses by Mike Gallimore earlier in the year:
At first blush, the thought of a bridge deal seems patently unfair to a player who has scored 131 points in 159 games over the last two seasons.  It seems almost like a penalty against a player who is arguably the team's offensive leader.  Why should Kucherov have to sign a short-term deal worth somewhere in the neighborhood of $4M per season given all he's done for the team?  Don't be a monster, Steve!!

But, is a bridge deal really all that harsh from a dollars and cents perspective?  If you're looking at year one, then sure.  $6.5M (or thereabouts) in the short-term is obviously better than $4M (or thereabouts) in the short-term.  Over the long-term, though, the difference between a bridge deal and a long-term deal being signed now really isn't all that significant.  Consider the following: If Kucherov signs a bridge deal now and continues to produce, his value on his next contract will be even higher.

I reached out to Twitter yesterday to ask two questions:

1) What do you think long-term deal signed today would look like for Kucherov?
2) What do you think a bridge deal and subsequent contract would look like for Kucherov?

People obviously had different ideas as to what makes sense in each of those scenarios, but the general consensus seemed to be that a long-term deal today should be in the neighborhood of $6M to $7M per season over six to eight years; a bridge deal, on the other hand, was estimated to be around two years in length with a cap hit between $3M and $5M, with the next contract coming in at eight years and $8M to $9M per season.  This is what I worked with for the purposes of this analysis.

Using a historical stock market return rate of 7% to discount future earnings, we can estimate the real value of each of the contract options presented to determine if a bridge deal is really all that unfair from a dollars and cents perspective.

DISCLAIMER: This analysis is loaded with assumptions.  In order to present a full picture, I had to make assumptions regarding Kucherov's potential future earnings and retirement dates.  My analysis has him retiring in his age 36 season, after what will hopefully be an illustrious career with the Lightning.

Take a look:


The assumptions made with regards to numbers and term are listed within the image.  In short, Option 1 has Kucherov signing a seven-year deal worth $6.75M per season now and then signing a seven-year deal worth $9M per season at age 29/30 based on his continued elite production; Option 2 has Kucherov signing a two-year bridge deal worth $3.75M per season now, an eight-year deal worth $72M total after that, and then a four-year deal paying him $7.5M to end his career.

The results?  The net present value of the two options is virtually the same.  Of course, there are other considerations to make when crafting assumptions, one of which was pointed out by Erik Erlendsson:
Adjusting the $9M values to $8.5M, which would match Steven Stamkos's contract, results in the following:


Again, the real value of the two options is almost identical; this time it's the non-bridge deal taking away the Gold medal by a slim margin.

What's the point of all this?  The point is that, assuming he continues to produce at an elite clip, the difference between taking a bridge deal and cashing in later versus cashing in now is virtually non-existent.  Kucherov will find himself in a very similar position, regardless of which option he chooses.  Taking a big discount now on a short-term bridge deal might sound like a big sacrifice, but the increased payday on his next contract can and likely would make up the difference.

Of course, the big x-factor here is the value to be placed on security.  What happens if Kucherov signs a bridge deal and gets injured?  What happens if his production falls off a cliff?  His ability to cash in big time on the next deal would be severely compromised.  For the bridge deal option to be attractive, it's likely that there would have to be some sort of risk premium associated with it.  But, if that means increasing the value of the bridge deal itself, doesn't that sort of defeat the whole purpose of signing him to a bridge deal in the first place?

So, let me make one thing ABUNDANTLY clear: This blog was not written with the intention of convincing you that a bridge deal makes more sense for Kucherov, or that Kucherov should bow to whatever Yzerman has put in front of him.  Rather, its purpose was to clear up the misconception that a bridge deal is somehow unfair to Kucherov from a dollars and cents point of view.  There are still plenty of reasons for Kucherov to want a long-term deal now as opposed to a bridge deal, but with little leverage he may find himself in a situation where he doesn't get what he wants right away.

As always, thanks for reading.

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