Wednesday, September 17, 2014

Ryan Johansen and the Economics of NHL Offer Sheets


Cam (aptly, @offersheet on twitter) raises a good question here. Why aren't offer sheets more common in the NHL?

Botchford's response - 'they always get matched, so what's the point?' is a big factor. It may be that teams don't have the stomachs to go big enough - in effect, you need to offer the player the same money he'd get as a UFA to make it happen.

Another answer that is commonly given is that the draft-pick compensation is a hindrance to offer sheets. I'll tell you right now: it's not. The inclusion of draft picks in the equation is a zero-sum game that may alter the ideal contract price, but not the incentive for a team to put out an offer sheet in the first place.

Let's use Ryan Johansen as an example. No, no one's signed him to an offer sheet yet, though for all we know, teams have called his agent and asked.

Johansen's Market Value

Blue Jackets president John Davidson revealed the team's most recent offers to Johansen, and most of the hockey media agreed that the numbers were pretty darn fair. The offers were:

- $6m over 2 years;
- $32m over 6 years; or
- $46m over 8 years.

Let's do a little reverse-engineering to guess a contract value. Reportedly, Johansen has 4 more years as an RFA; so the last 4 years of the 8-year deal are UFA years. If years 7 and 8 are worth $14m (the difference between the $46m of the 8-year deal and the $32m of the 6-year deal), the Jackets are working off a UFA valuation of $7m. For comparison, Paul Stastny, Alex Semin, Daniel Sedin and Henrik Sedin are all players currently on UFA contracts with $7m annual averages.

Let's put aside, for a second, whether or not those players are comparably valuable to Ryan Johansen. Maybe they're not far off. But the point is, the offer is such that if Johansen is worth $7m/year on the open market, he'd be worth $56m on an 8 year contract, or $49m on a 7-year deal (which is the longest you can go on an offer sheet).

Back to RFA-land for a second. If the UFA years are worth $7m each, based on the $46m/8 offer, that leaves $18m for the first 4 years. If years 1-2 are worth $3m each (based on the bridge contract), years 3-4 (arbitration years) are worth $6m each. If the Jackets offered Johansen a 7-year deal, they'd be offering him $39m/7 ($46/8 minus $7/1)

Adjusting for Draft Pick value

So if Johansen would get $49m/7 as a UFA (again, let's assume), we have to deduct a bit from that price for the draft pick compensation. The draft pick compensation depends on the AAV of the offer sheet; in 2013-14, a $7m AAV would call for compensation of two 1st-rounders, a second and a third. However, because we're going to deduct a little from the price to reflect the cost to the buying team, we're going to slip down one bracket to compensation of a 1st, a 2nd and a 3rd.

We don't know the dollar value of those draft picks; there are a lot of variables, including where in the round they are, who the team might get, and so on. But for sake of argument, I'm going to pull a number out of the air and say that the three picks are worth $5m total. Again, let's assume. Play along with me.

So now we're looking at a $44m/7 market price for Johansen, after the value of the picks is removed. Mind you, the total cost to the signing team is $49m when you include the lost draft picks. Note that this valuation is considerably higher than the $39m/7 valuation represented by CBJ's offers. The decision the signing team faces is:

Door #1: Give Johansen an offer sheet, and if it's accepted, he's worth $49m over 7 years. Pay $44m and lose $5m worth of draft pick assets. Net gain: zero.


If Johansen signs the $44m offer sheet, Columbus has a decision to make:

Door #1: Let Johansen go. Pick up draft picks worth $5m. Net gain: $5m.
Door #2: Match the offer sheet at $44m/7. Keep Johansen, who is worth $49m over the contract. Net gain: $5m.

Wednesday, June 25, 2014

Marian Gaborik's contract could net Kings 5-20% cap savings

The news just came out that Marian Gaborik has signed a 7-year, $4.875m AAV contract extension with the Kings. He's 32 years old now, and will be 39 by contract's end. There's a good chance he'll be retired before it's over.

If the Kings are smart (they are), they're structure the deal as front-loaded, as follows:

Years 1-3: $6,500,000
Year 4: $4,875,000
Years 5-7: $3,250,000

This is, as far as I can tell, the most front-loaded, cap-friendly structure the CBA allows. It allows for the possibility that Gaborik may retire before the contract's up, without causing any cap recapture.

If Gaborik retires after 5 years (age 37), the Kings will have paid him a little over $27.6m for 5 years - a true AAV of $5.525 million, yet they'll only face a $4.875m cap hit. If he retires in just 4 years, that AAV is $6.09m; if he sticks out 6 years, it's a $5.146m AAV.

Regardless, the proper salary structure in this case will allow the Kings to get a cap discount of 5-20%. That's a pretty hefty advantage.

This will be something that any team can take advantage of for star players that are in their early 30s. Just as before with the long-tail contracts, you can get a cap savings by including years where they're likely to be retired. The savings isn't as large as it once was, but it's still substantial.

Follow Rory Johnston (@rnfjohnston) on twitter: twitter.com/rnfjohnston

edit: the original version of this post had some calculation errors, which have been fixed.

Tuesday, March 4, 2014

Ryan Kesler, and trading in-conference

Elliotte Friedman is reporting today that though the Canucks have many suitors for Ryan Kesler, they'd prefer not to trade him to a Western Conference rival. Of course they aren't; teams, as a matter of course, usually try to trade players outside their conference, or at least not to a division rival. This is the case in other pro sports too.

The main reason is obvious: teams don't want to get beaten or embarrassed by their former stars on a regular basis. It's a good way to enrage a fanbase. If you're a GM, losing a key game or series facing the player you traded is a fireable offence.

Does it stand up to reason, though? I'm not so sure it does. Kesler is 29, and has two more years on his contract. Suppose you trade him to the Blackhawks, and he and Jon Toews form a formidable dynamic duo for a couple of years. Yes, the Canucks will lose a couple of games to that team. But if Vancouver's entering a rebuild - and given that Luongo and Edler's names are out there too, they seem like they are - what's the harm in losing ganes to the Blackhawks in 2014-15? You're not trying to be competitive next year.

More seriously, if you assemble some young talent to aim for contending in, say, 2016-17, doesn't it actually make a lot of sense to send Kesler to Chicago? By that time, he's possibly left them as a UFA, is in his 30s, and you've stripped them of Brandon Saad and a first-rounder (just spitballing here), and knocked them down a notch such that you've got a better chance of winning games against them.

Just a thought, really. It's such a well-worn truism of the trade market but I think people are too wedded to it.

Follow Rory Johnston (@rnfjohnston) on twitter: twitter.com/rnfjohnston

Wednesday, December 11, 2013

Alex Ovechkin vs. the former Southeast Division

Alex Ovechkin scored a very impressive four goals against the Tampa Bay Lightning last night. They've been one of his favourite opponents over the years; he's scored 70 points against them in 52 career games, his second-highest total against an opposing franchise.

Now, there's no doubt that Ovechkin is a special player, and one of the best of his generation. But has he had an easier time of it because of the fact that he's spent most of his career to date in the brutally awful Southeast Division, which existed up until 2012-13?

Let's consider Ovechkin's numbers against those teams:


Opponent
GP
G
A
Pts
Pts/gp
Tampa Bay
52
35
35
70
1.35
Florida
47
30
31
61
1.30
Atlanta/Winnipeg
54
40
41
81
1.50
Carolina
54
25
42
67
1.24
TOTALS
207
130
149
279
1.35

To put it mildly, that's a massive beating. If you imagine Ovechkin played only SE division opponents, his average 82-game season would be 51 goals and 59 assists, for 110 points.

 Now, consider this:

Opponent
GP
G
A
Pts
Pts/gp
Eastern Conference
516
324
315
639
1.24
Non-SE Eastern Teams
309
196
166
362
1.17
Western Conference
114
73
58
131
1.15

Ovechkin's performance against the rest of the league drops off significantly. Against the Eastern Conference as a whole, his numbers still look amazing, but if you cut out the SE division, it drops quite a bit. Against the rest of the East, he's a 96-point player; against the West, he's a 94 point player.

That's not to say that playing in the Southeast division has been worth 14 or 16 extra points a season for Ovi; obviously, he doesn't actually have the luxury of playing all 82 games in-division. In the six-division era, teams played about a third of their games against divisional opponents; that's about 27 games. They'd play about 20 games against each of the other two divisions in their conference.

So, in actual fact, Ovi was only playing about 7 extra games against SE opponents than other Eastern teams. If playing the SE division only is worth 15 extra points over 82 games, that means 7 extra games in-division has been worth about 1.3 extra points per season for Ovi versus, say, Sidney Crosby. Versus a Western Conference player, it's more significant - as much as 4 points.

While we like to say that players in the Southeast had a big lift from regular access to punching bags like the Florida Panthers, it's easy to forget that they all had to play plenty of non-divisional games, and that everyone else gets to play the SE division too.

The big difference, really, has been between the two conferences; for most of the six-division era, teams only played each team in the opposite conference once a year, so Western teams got barely any chance to feast on the weak SE divison. So don't pile on Ovechkin for getting easy pickings down South; in fact, it's been the entire Eastern Conference that enjoyed that advantage.