FG on Fox: On Valuing Stanton’s Opt-Out Clause

$325 million. That’s the number that gets your attention, and it should; the contract that Giancarlo Stanton signed with the Marlins is the largest in the history of baseball, and it will span the next 13 years. There are kids currently in first grade who could theoretically get to the big leagues in time to play with Stanton before this contract expires. The $325 million commitment is twice as much as Loria paid to buy the entire Marlins organization back back in 2002. The deal is staggering in both length and cost, but as Jeff Sullivan wrote last week, it’s an entirely reasonable contract for one of the game’s best players.

But there’s another fascinating aspect to Stanton’s contract: the $325 million figure might end up being nothing more than a mirage. Because of the leverage he commanded, and potentially some lingering distrust of the franchise after their last spend-a-bunch-of-money-then-trade-everyone fake out, Stanton’s representatives were able to negotiate an opt out clause into the deal, meaning that he can choose to void the deal after the 2020 season.

If Stanton continues to perform at an elite level, it’s entirely possible that he could void the last half of the deal and land a new contract for even more than this deal guarantees him next decade. After all, Stanton will have just finished his age-30 season when the opt-out decision comes due, and even at that age, elite players are landing 10 year contracts in free agency. Alex Rodriguez used this exact tactic in 2007 to opt-out of the final three years of his initial mega-contract, turning the remaining $72 million into a new 10 year, $275 million contract that the Yankees are still regretting.

Since that deal, the opt-out clause has become an increasing popular request for premium free agents, as Clayton Kershaw, Zack Greinke, and Masahiro Tanaka — among others — have had opt-outs negotiated into their contracts. Greinke’s decision comes next winter, when he’ll have $71 million remaining on the last three years of his deal; assuming he stays healthy and pitches reasonably well in 2015, opting out should be a pretty easy call, given the market price for high quality arms.

And that is exactly why the game’s best players are increasingly asking for these options to be inserted into their deals. For the player, a large guarantee with an opt-out is the ultimate win-win, as they secure a significant paycheck even if their performance declines or they suffer an injury, but they aren’t stuck with a below-market salary over the long term if they play well, or if the economic status of the league improves after they sign their mega-contract.

Read the rest on Just a Bit Outside.





Dave is the Managing Editor of FanGraphs.

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tz
8 years ago

I still don’t get it why the backloading is such a great way to position an opt-out.

If Stanton is great for the next 6 years, the Marlins have a bargain over that period before he leaves for greener pastures. Great, I get that.

BUT, if Stanton is injured or spent toast in 6 years, the Marlins will be stuck owing $218 million to a guy with minimal value. They’re gambling $218 million, or about 10 times their current payroll, that this won’t happen.

Even if inflation runs high, there’s just no way to make that $218 million gamble look good. The potential loss would make the Vernon Wells debacle look like peanuts.

belarugh
8 years ago
Reply to  tz

You don’t sign a $325 million deal if you are expecting the player to be spent toast. This clause increases the chance that within the “superstar” outcome tree, the most probable outcome has the lowest cost to the Marlins. If he turns bad the Marlins are screwed anyway.

Brooks
8 years ago
Reply to  tz

Jeffrey Loria is about to turn 74, and the only thing aside from making money that he has ever cared about is art. He can’t put Stanton on his wall. Therefore, I have no doubt that long before Stanton’s opt-out clause vests, Loria will have sold the Marlins for a substantial profit. The possibility of paying Stanton $218 million of really bad money will be another billionaire’s burden.

tz
8 years ago
Reply to  Brooks

Aha!

While this doesn’t justify this type of deal in general, you might have nailed why Loria did this with Stanton. No different than Mike Ilitch pouring his fortunes into big contract for his Tigers while he’s still alive.

vivalajeter
8 years ago
Reply to  tz

It seems completely different to me. Ilitch is looking to win a championship while he’s still alive, regardless of how much it costs the next generation. Brooks seems to be implying that Loria is looking to sell the team, and this deal will increase his profit.

Steve
8 years ago
Reply to  Brooks

Can’t put Stanton on his wall? This IS Loria… let’s not rule anything out.

No Comment
8 years ago
Reply to  tz

If he’s injured or spent toast in 6 years, Stanton won’t opt out regardless of how the deal is structured. If I read you correctly, your real objection is over the length of the deal, not the backloading. The Marlins are only protected in the event of injury if the team has the opt out, but that is obviously unrealistic. The only protection they could engineer into the deal is extracting maximum value in the first six years if Stanton opts out.

Jianadaren
8 years ago
Reply to  tz

It’s beneficial to the team for two reasons:

1) time value of money – postponed liabilities are less expensive than current liabilities

2) reduced risk of having to pay it. Guaranteed money you have to pay 100% of the time. Option money you only have to pay if the option is exercized. If given the choice, you’d rather commit your money to the option. Worst case it’s a wash, best case you saved money. Think of the opt-out as if the player has a call option on the contract.