Important Takeaways from the Cole Hamels Contract Extension

Here’s my key takeaways from the Cole Hamels contract extension with the Phillies:

• Signing Cole Hamels is an important step in helping the Phillies remain competitive for the next several years , but will necessarily set in motion a number of other moves to restructure their payroll
• The elimination of draft pick compensation for traded players in the new CBA is having a profound impact on the mid-season trade market for players like Hamels.
• It’s too early to tell if the new CBA’s onerous penalties for exceeding the Competitive Balance Tax threshold will put a damper on free agent salaries, but the early returns point in that direction

Signing Hamels was a necessary move by the Phillies, but will present other challenges to the organization. Prior to the Hamels signing, the Phillies had about $110m in salary obligations for the 2013 season committed to six players—Lee, Halladay, Papelbon, Howard, Utley, and Rollins. That commitment would rise to the low $120′s if Hunter Pence is retained. The Hamels extension places the Phillies’ obligations at more than $145 million for eight players. Without any major trades from that group, the Phillies would need to fill about 17 roster spots at an average salary of about $2 million, in order to not exceed  the Competitive Balance Tax threshold for 2013. We’re very likely to see either Halladay or Lee dealt, either in the next few days, or at the end of the season. Not only do the Phillies need to reduce the concentration of their payroll that is clustered in a handful of players, but they also need to restock with younger, low cost players who can ultimately make an impact on their major league roster.

By signing Hamels, the Phillies retain the youngest of their three aces, who also happens to have the lowest value in the mid-season trade market. An unsigned Hamels had limited trade value as a pure summer rental, when compared to Halladay or Lee, who are signed through 2014 and 2016, respectively (including their option years). Hamels would have provided an acquiring team about 12 or 13 starts over the balance of the regular season, while Halladay provides about 80 starts over the next 2½ years, at a below market salary, given his talent level.

The elimination of draft pick compensation significantly changes the value equation for mid-season trades by devaluing pure rental players with expiring contracts. For example, when CC Sabathia was traded from Cleveland to Milwaukee in July of 2008, the package included Matt LaPorta, a number 7 overall pick and the top rated prospect in the Brewers system, plus Michael Brantley, and pitchers Rob Bryson and Zach Jackson. That impressive haul was supported by the draft pick compensation the Brewers could count on when Sabathia walked away in November. When Sabathia left Milwaukee for the Yankees, the Brewers received the 39^th and 73^rd overall picks as compensation. Under the new rules, Hamels was likely to yield no more than a couple of mid-level prospects. The way to circumvent the elimination of draft pick compensation is to deal players before the last year of their contract. This diminishes its importance, as draft pick compensation becomes a lower percentage of the total value the player provides to his acquiring team. While dealing Hamels might have gotten the Phillies a couple of mid- to low-level prospects, dealing Halladay or Lee puts them in the mix to secure a prospect package that includes a top talent like the Rangers 19-year old shortstop sensation Jurickson Profar.

The value of Hamels’ contract may be a foreshadowing of what to expect in the upcoming free agent market. In a world where Sabathia gets $161 million (3½  years ago) and Pujols and Fielder sign $200+ million deals, it would be reasonable to expect that one of baseball’s top pitchers, entering his age 29 season would get a $170+ million deal. My statistical models of the behavior of the free agent market support that valuation, at least under the rules of the old CBA. (While the deal was reported as 6-year, $144 million, it is said to contain a seventh year option that could take its value as high as $162 million.) Maybe Hamels gave the Phillies a hometown discount, or perhaps we are not living in the Sabathia, Pujols, Fielder world anymore. The Competitive Balance Tax threshold, which will rise to $189 million by 2014, may put a damper on the high-end free agent salaries, as teams will be reluctant to commit too many dollars to any one player. We’ll know more in the coming months.

The re-signing of Hamels is an important move in the Phillies quest to extend their competitive window. The reality is the Phillies have too many high-priced players and will be challenged to surround them with enough talent to stay competitive under the new Collective Bargaining Agreement. They need to acquire high potential minor league talent to provide a low cost source of future wins and provide better balance to their payroll. Halladay or Lee become the perfect trade chips to accomplish both objectives.