Week in Transactions: Indians officially sign Edwin Encarnación

This week’s post is going to be a bit different than usual, because the Indians just made a very unusual signing. I’m going to try to lay out why the Indians were able to sign one of the top free agents on the market, beating out clubs with closer ties to EE and more financial resources, and in Toronto’s case, both.

Signed 1B Edwin Encarnación to a 3-year, $60M contract ($25M 2020 team option)

Designated LHP Edwin Escobar for Assignment

The yearly breakdown of the guaranteed $60M (actually it’s $70M if you include the signing bonus and buyout) is important to note:

2017: $13M

2018: $17M

2019: $20M

2020: $5M buyout OR $25M team option

$5M signing bonus (date unknown)

The contract is backloaded, but not excessively so. The Indians do potentially have some contracts coming off the books in the next couple years in order to make room for the increases in this deal (along with raises for the other players):

2018: Carlos Santana ($12M), Bryan Shaw ($4.5M)

2019: Andrew Miller ($9M), Cody Allen (~$9M), Michael Brantley ($11M), Lonnie Chisenhall (~$6M)

The rub of course is to be able to replace these pending free agents with players that are less expansive and also almost as valuable. That’s going to be the mantra of the Indians over the next 3-4 as they attempt to remain competitive while also losing major contributors. In yesterday’s press conference, Chris Antonetti noted team ownership’s “leap of faith” in approving the expenditure, which tells me that the 2017 payroll might be the high water mark for the near future unless attendance jumps beyond what the Indians are projecting. And I would assume a lot of the justification for the near-term payroll commitments have attendance revenue increases baked in.

The Indians were also helped by external factors. Other big market clubs for various reasons held off on pursuing Encarnacion. One of them, the Boston Red Sox, would have seemed a natural fit for EE; they also are in the Eastern Time Zone (something EE preferred), play in the American League, and are championship contenders. And the Red Sox needed a DH to replace the retiring David Ortiz. They also had the financial wherewithal to outbid the Indians if it came down to a bidding war. I thought that Encarnacion to Boston was inevitable (with him staying in Toronto the other real option). So why weren’t the Red Sox in on Encarnacion?

Alex Speier of the Boston Globe answers this question very well. His entire column is well worth reading, if only for insight about an American League rival, but the most relevant piece to this topic is that the luxury tax was a major reason (if not the reason) why Boston shied away from Encarnacion. Teams who exceed the luxury tax threshold three consecutive years pay a 40-50% tax on all payroll over that threshold. If they are able to stay below the threshold ($195M) this year, that tax resets, which is important because it’s a near certainty that they’ll exceed the threshold in both 2018 and 2019 due to contracts and raises due to arbitration. If they had signed Encarnacion for the same terms (3 years, $65-70M), they would have had to pay $15M in luxury tax payments just on the EE contract alone. So the deal would have been essentially 3 years/$85M. By holding off on Encarnacion, the Red Sox are placing themselves in a more favorable financial position to spend in 2018 or more likely 2019, when there are projected to be several superstars available on the free agent market.

Toronto, who was in my mind the other main competitor for Encarnacion, seemed to misread the market (as did EE and his agent, as it turned out). This timeline gives you some insight into how Toronto approached the negotiations. Their best offer, made in early November, was much better than what EE eventually got (4 years/$80M with a potential for a 5th year), but EE didn’t want to sign a deal before hearing from other teams. Toronto would sign Kendry Morales soon afterwards, which didn’t entirely shut the door on EE returning, but the two sides wouldn’t be able to agree on a deal. Had Toronto been willing to wait out the market even a bit, I think Encarnacion would have remained a Blue Jay.

The market itself is another reason why the Indians were able to land Encarnacion. There were few good starting pitchers available in free agency, but there were many 1B/DH available (and several are still available). Kendry Morales (TOR), Mitch Moreland (BOS), and Carlos Beltran (HOU) signed before Encarnacion, and if you include corner outfielders who fit into that slugger role, Mike Napoli, Mark Trumbo, and Jose Bautista are all still available. There was much more of a supply of these types of hitters than demand, especially after some of the big market clubs got cold feet because of the luxury tax.

Chris Antonetti said yesterday that he didn’t think he had any chance of landing Encarnacion going into the offseason, and I think he had good reason to think so. It took a series of favorable events and ownership to step up to make yesterday’s introduction possible.