Friday, April 27, 2012

The Luongo Contract: Is He A Bargain at $5.3 Million?

It looks like Vancouver Canucks goalie Roberto Luongo is on his way out of Vancouver. According to TSN, he will soon submit a list of teams that he would accept being traded to. Is Luongo tradeable? What of his contract that takes us to 2022 (when robots will feed us and Twitter will be President)?

When Luongo signed his massive deal in 2009, it seemed at that time he might be untradeable.

That, however, is not the case. Let’s take a look.

The Deal

In 2009, Luongo signed a 12 year/$64 million dollar deal. He was 31 years old when he signed the deal, which means by contract’s end he will be 43.

The distribution of pay across the 12 years is as follows:
2010-11: $10 million
2011-12: $6.716 million
2012-13: $6.714 million
2013- 14: $6.714 million
2014-15: $6.714 million
2015-16: $6.714 million
2016-17: $6.714 million
2017-18: $6.714 million
2018-19: $3.382 million
2019-20: $1.618 million
2020-21: $1.0 million
2021-22: $1.0 million

That means his cap hit is $5.333 million. Remember the cap hit is the average yearly salary over the life of the contract and not what a player makes in a specific year.

So it comes down to his cap hit. Back in 2009, the length of the deal (taking Luongo into his early 40s) together with the cap hit made it seem like he wasn’t tradeable. Of course, times – and the salary cap – have changed.

Here are some of the reasons he is now tradeable.

The Rise of the Salary Cap

Yes a cap hit of $5.333 is not chump change in a cap world. However, since the inception of the cap in 2005, the cap has gone up dramatically:
2011-12: $64.3 million.
2010-11: $59.4 million
2009-10: $56.8 million
2008-09: $56.7 million
2007-08: $50.3 million
2006-07: $44 million
2005-06: $39 million

When the adjustment to the players’ share of revenue is made from 57% to about 51.5% (in my estimation) the cap will stay relatively flat or go up or down by about $2 million or so. So this year, there won’t be a big change in the salary cap. However, in coming years, expect it to continue to rise. The NHL continues to grow revenue under the capable watch of NHL COO John Collins. Since he took over in 2006, the NHL’s revenue has grown over a billion dollars. The NHL is enjoying upward momentum and will continue to leverage its Comcast TV deal to grow the game. All signs point to up – for revenue and the cap.

When Luongo signed in 2009, the cap was $56.7 million. Now it’s $64.3 million. So that’s a gain of almost $8 million. There’s a lot more place under the cap to make room for Luongo.

Also ask yourself this: in 2015, what will the cap hit be? Assuming it;s higher, Luongo's deal will look a lot better from a cap standpoint.


Luongo’s $5.3 million cap hit is starting to compare pretty favourably to other goaltenders in the league:

Lundqvist - $6,875,000
Ward - $6,300,000
Miller - $6,250,000
Backstrom - $6,000,000
Kiprusoff - $5,833,333
Bryzgalov - $5,666,667
Luongo - $5,333,333
Brodeur - $5,200,000
Thomas - $5,000,000
Fleury - $5,000,000
DiPietro - $4,500,000
Hiller - $4,500,000
Niemi - $3,800,000
Khabibulin - $3,750,000
Halak - $3,750,000
Lehtonen - $3,550,000
Roloson - $3,500,000
Rinne - $3,400,000 ($7M next season)

Luongo’s deal falls somewhere in the middle of the top tenders this season. Next season, Pekka Rinne’s cap hit on his new deal with be $7 million. He hasn’t yet been to a Cup final.

High Five to the Circumvention of Cap

When the Kovalchuk decision came out, the arbitrator Richard Bloch mentioned in a footnote to his decision that there were other contracts that constituted circumventions of the salary cap given that throwaway years were added to contracts to artificially lower the cap hit. One of those contracts was Luongo’s – and for good reason. When Luongo turns 40 years old, his salary goes from $3 plus million to $1.618, and in the last two years his salary is $1 million. These years lowered the cap it from about $6.7 million to $5.3. Big difference for a team looking to acquire him.

As well, the last 4 years of his deal amount to about $7 million. That means that a team would happily buy him out before he turns 40 years old in 2018. There would be a cap hit on the buyout, but it would be manageable.

Or rather than buy him out, before the 2018 season a team could trade him to a cap hungry team looking to make the floor. Why? By then his salary cap hit will be more than his actual salary. So the team that acquires him will enjoy a net gain on his cap hit. People love net gains.

Wanted: Goalies

It is getting a lot tougher to find quality goaltending. Just look at the playoffs this season so far. A lot of goalies have struggled. When Luongo is at his best, he is one of the best goalies in the league. Yes he has had some issues in key games and in key situations (shaky glove syndrome). However, there aren’t a lot of good goalies to go around.

Look at the Flyers – Bryzgalov’s cap hit over the next 9 years is $5.6 million. Early on, Bryzgalov has been shaky and has emerged as a renaissance man or eccentric – you take your pick.

Whatever you may think of Luongo in the clutch, he will immediately make a team better (like Tampa).

Playoff Revenue

Teams make their money in the playoffs. When revenue is added up – gate, media, merchandising – teams make about $4 million per playoff game on average. Some of that is shared with the league and other teams. Still, teams pocket decent money with home playoff games.

As well, many execs will say that the playoffs are a springboard for marketing and ticket sales for the next season. In fact, for many teams making the playoffs is critical to the long term viability of their franchises.

Luongo helps your team get into the playoffs – there is no doubt about that. Once you’re in, you start to generate that key revenue and position yourself favourably in the marketplace. This will matter to teams, as they will look at his contract as an investment with a possibly strong return.

So there are lots of reasons why Luongo’s contract is moveable. The comparables are good, the salary cap hit is manageable, he’s a really good goalie, and the potential return on his contract is promising.

Frankly, at this point, isn't his $5.3 million cap hit looking like a bit of a bargain?

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