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Sunday, January 25, 2009


Unlike the contract for Dustin Pedroia, the Sox are not getting a bargain by signing Kevin Youkilis. If you were a member of RSN living under a rock, the first or third baseman is getting a $41.125M four year contract with a $13M option or $1M buyout in 2013. The deal appears to be close to a 2006-2007 market deal for Youk.

The present value
of Youk’s contract is approximately $38.44M (assuming the signing bonus is paid in 2009, the option buyout is paid in 2012 and 2% interest rate). If the option is exercised, the present value of the deal reaches $49.02M, but let’s focus on the guaranteed monies flowing to Youk.

Since the “Greek God of Walks” is still under the Olde Towne Team’s control for the next two seasons, his salary would be subject to arbitration. The basic rule to find compensation for arbitration eligible players is 40% of market value (MV) for first years, 60% of MV for second years and 80% of MV for third year eligible players. MV is determined by finding comparable players.

Youk is most comparable to Mike Lowell and Aramis Ramirez who are corner infielders that have signed free agent contracts over the last few winters. The average yearly present value of Lowell’s contract was $12.02M and $14.11M for Ramirez. The mean of both is $13.06M and 60% is $7.84M, 80% is $10.45M. All thing being constant, Youk could expect roughly $18.29M over the next two seasons, but those forecast earnings should be discounted due to the risk of injury, production declines, etc. 2009 was discounted at only 5%, which reduces Youk’s salary to $7.45M. 2010 was at 10% or $9.4M.

In 2011, KY would have become a free agent. If the market for free agents rebounds back to 2006-2007 levels, Youk would receive $13.06M. Again discounting the expected market value by 15% gives him a salary value of $11.10M. Since Youk would expect to attain at least a two-year contract, 2012 would be a guaranteed salary and would not need to be discounted. Following this logic, Youk would have the following salary values:

2009 - $7.45
2010 - $9.40
2011 - $11.10
2012 - $13.06

The present value of the above cash flows is $38.36M or roughly the same as Youk’s deal signed a few weeks ago. Since the Olde Towne Team owns Youk’s rights for two more seasons, he is on the wrong side of 30 and one has to question KY’s ability to move across the diamond in 2011 at the age of 32, the Sox should have gotten a larger discount.


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