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Ragenomics: The Ovechkin Deal

The following is a guest post by Japers' Rink commentor/financial analyst Rage. If you like it, he might get another spot in the future. If you don't, it's back to the Commentors Bin with the rest of you.

First things first: the Caps just got a hell of a deal. They stole a bunch of money from Alex Ovechkin (or, alternatively, Ovechkin, in his limitless good will, saved Ted Leonsis a bunch of money). If the deal truly was six years for $54 million and then an additional seven years for $70 million, Leonsis et. al. is the greatest negotiating team of all time.

Think about it this way: with conservative inflation assumptions (around 1.77%), Ovie will be earning the exact same amount in present value dollars in Year Seven as he is in Year One (and less in each subsequent year). How many of you would be completely comfortable going 13 years without a raise? That’s a win for Ted.

Which brings up the question of whether the cost in Year 1 is a "fair" price to pay. That, of course, is much fuzzier. Yes, Alex will earn $300K more than Sidney Crosby [ed. note: actually, they'll earn the same amount - $9 million - but Sid's contract is structured so that the cap hit will be $8.7m while Alex's will be just over $9.5m based on the average annual salary over the course of the deal]. However, if you consider the long-term gains, the short-term costs are justified. In terms of strict inflationary dollars (assuming 2% inflation), Ovy has left nearly $14m in 2008 dollars on the table, and anyone who thinks that Crosby won't be capable of earning more than $10m when his new deal runs out in five-plus years is crazy.

It's also interesting to note, that no player on a team can earn more than 20% of the total team outlays in salary, incentives and bonuses. This means that for next year, the Caps must spend more on the team around Alex (up to $48m) than they currently are paying (just over $40m). That’s a pretty big jump (even if Mike Green gets $6m per year on his new deal).

Now let's turn our attention to some of the stuff we've seen floating around the blogs and papers today (summarized, as many have been posted by more than blog/paper):
  • Claim: The contract will eat up tons of cap space every year.
    • Currently, the cap is just over $50m. Let’s assume that the present value of the cap stays at this value (this would mean the NHL’s revenue is just keeping pace with inflation, which we'll estimate again at 2%). As a percentage of the cap, Ovie’s salary would start at 18.59% and drop to 14.66% by the end of the contract. That is the WORST case scenario. If there are any large revenue jumps (as there have been the past two years), Ovie’s percentage would fall lower and lower. [ed note: the real beauty here is that not only will the Caps be getting great value as the contract passes its midpoint, but they'll be getting a break on the cap too when they're paying a player $10m per year but only taking a $9.5m cap hit!]
  • Claim: The Caps should be afraid of a repeat of Jaromir Jagr Contract Hell.
    • This is probably the biggest risk of the deal. Let’s enumerate the risks demonstrated by the Jagr deals and other long-term marriages:
      • Ovie will lose his zeal for the game, and stop being worth the money.
      • Ovie will get traded and the Caps will have to pay for him after he's gone
      • Ovie plays such a rugged game that he will get injured and have to end his career early.
    • All of these risks are 100% legitimate. However, we have some mitigants:
      • Ovie has shown zero likelihood of bailing on even a single game, no matter how relatively insignificant the game may same.
      • Under the new CBA, teams aren't allowed to pick up a portion of a traded player's salary. Besides, as we’ve covered, Ovie’s salary becomes more palatable over time, not less. And his salary should be getting lower as a percentage of the cap over time, not higher.
      • The Caps are insured in case of an injury (we assume).
  • Claim: Crosby and Ovechkin both left gobs of money on the table.
    • Crosby signed a big deal - but could have signed for more - and will cash in (likely to the tune of $11m-plus in present value dollars if revenues continue to grow) again in five years.
    • Ovie signed a huge deal - but could have signed for more - and will cash in again (maybe) in 13 years. While his cap hit is $838,461.53 (approximately one Brent Johnson) more than Crosby's for the next five years, Ovie left a ton of money on the table over the course of his career. Whether that’s because he is so good natured, or dumb, or a team player, or whatever, others can decide, but what is 99% certain is that in six years, Alex's cap hit will be less than the cap hit Sid will be inflicting on his team (whoever it might be).
  • Claim: The Caps are taking some of a cap hit now for immense relief later.
    • Exactly. This contract is essentially a forward bet on the success of the NHL or, at very least, its ability to keep pace with inflation. There are many young players in the system who will be making minimum salaries in the next five years, but when they need to be resigned, the cap will have moved and Ovie’s contract will have stayed the same.
  • Claim: This deal means that Ovie is worth nearly as much as the 10 NHL teams that are valued around $160m or less.
    • This is an absurd statement. If I receive an annuity (with seemingly no expiration) payment of $15 a year, and you receive 13 lump sum payments of $9, who is going to make more money? Ovie is worth a whole lot, but if you want to compare apples to apples, compare the $160m to the $9m he’ll make next year.
  • Claim: The whole lockout and lost year were for nothing, as this deal shows.
Conclusion: As with any deal of this magnitude, there are huge risks involved - the length, injury, enthusiasm, revenue shrinkage, etc. But there are also enormous benefits, even in a conservative projection of the market. This deal could (and should) work out very well in the Caps favor. And with $124m headed into his bank account, it ain't too bad for Number Eight either.