Carlos Santana Extension is Absolute Steal

Rumors began to spread Monday night that the Cleveland Indians had agreed to an extension with Carlos Santana that would buy out his forthcoming arbitration years and give the Tribe a team option for what was his first free agent season, 2017.

On Tuesday, the Indians announced that the deal was official: it’s a five-year contract (with the possibility of a sixth) worth $21 million. On top of his $501,900 2012 salary and the $550,000 he’ll now earn in 2013 (his last pre-arbitration season), Santana will make $3.5 million in 2014, $6 million in 2015, and $8.25 million in 2016. The Indians hold a $12 million club option with a $1.2 million buyout for 2017.

While it pales in comparison to some of this winter’s blockbuster deals, $21 million is a pretty substantial commitment for a small-market team like the Tribe. But it’s money well spent—this deal looks like a complete and unambiguous win for the Indians.

In order to properly assess the merits of an arbitration-avoiding deal, we have to place it in the context of the arbitration system. A good player will see his standard of living increase fairly dramatically once he enters his arbitration years, but in most circumstances he won’t get anything close to the payday he’d earn were he able to sell his services on the open market.

As a general rule of thumb, first-year arbitration players make about 40 percent of what they would get as free agents, while second- and third-year arb-eligible players get about 60 and 80 percent of their free-market value, respectively. So in essence, a player receives about 180 percent of his market value throughout his arbitration years, and Santana will earn $17.75 million in his, suggesting that he could pull down about $9.9 per annum as a free agent.

Here’s our first hint that the Indians win in this deal. Assuming a current market value of about $5 million per marginal win and ignoring inflation, Santana is being paid as if he is worth just under 2.0 wins above replacement each year, which would be about a league-average player. Of course, Santana is far, far better than a league-average player.

This is the man who walked in over 19 percent of his plate appearances—as a rookie. He has a 130 career OPS+ and 35 homers in just over 200 games. He’s in the conversation as one of the best young hitters in baseball while playing catcher, the spot on the depth chart at which most teams simply punt offense. And he just turned 26, so the best may be yet to come. Average? I think not.

But we need to take a more nuanced approach in order to properly analyze this deal. Using a five percent inflation rate in the player market and the rule-of-thumb arbitration guidelines, the following chart provides an estimate of the break-even point of Santana’s production for each of the 2014-17 seasons beyond which the Indians earn surplus value from his contract.

Factor in inflation and this extension looks even more favorable for Cleveland. Sure, catchers wear down and there’s always the possibility of injury, but these benchmarks should be easy for Santana to clear every year.

Consider this: In the 46 games Santana played as a rookie in 2010, FanGraphs estimated his value at 1.8 WAR. Baseball Prospectus was even more generous, giving him 2.1 WARP, while Baseball-Reference pegged his performance as worth 2.2 WAR. He was a rookie who got less than a third of a season’s worth of playing time, yet he still matched or outpaced all four of these break-even points. And in 2011, he roughly doubled these benchmarks as his WAR estimates sat between 3.5 and 3.9.

Yes, Santana could conceivably start to age towards the end of this deal (though his guaranteed contract ends when he’s 30), and there’s always the possibility of regression or collapse. But even if he doesn’t take another step this season or next—and I fully expect that he will—you’d have to be quite the skeptic to think he won’t be able to surpass these benchmarks over the next five years.

But this cost breakdown isn’t quite right; it treats Santana’s $12 million option as an optional $12 million, while in reality $1.2 million of that is sunk cost because of the buyout. So the real question for 2017 will be whether or not Santana is worth $10.8 million to the Indians, and the other $1.2 million could be lumped in with his 2016 salary, like so:

Or we could spread it evenly throughout his arbitration years:

There are slight discrepancies based on how you allocate that $1.2 million, but the overall effect is the same: If Santana is merely a league-average catcher—and he could be so much more than that—the Indians win this deal.

Nor does Santana even have to retain his skills over the course of the deal in order to give Cleveland some surplus value. Let’s assume that, by some cruel twist of fate, he’s already started to decline at age 26 (we’ll say 3.3 WAR for 2014), he’s barely above-average in 2015 (2.5 WAR) and he’s only a marginal player by 2016 (1.0 WAR). The Indians would still get more than their money’s worth over the course of the deal:

Not to mention that the Indians might have actually bought out four of Santana’s arbitration seasons—at this point it appears unlikely that he would have qualified as a Super Two player and thus been eligible for arbitration a year early, but it is a small possibility. In that case, Cleveland would have bought out his first arbitration year (2013) for little more than the league minimum wage.

Every long-term deal carries some amount of risk so there’s always a chance this deal could go awry, and it’s easy to see why a player with less than two years of MLB experience would leap at the chance to score a sure $21 million. But for now this extension seems like nothing short of a coup for the Tribe, and locking Santana up at a reasonable price for most of the next decade could end up being a key factor in bringing a championship to Cleveland.

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