First things first, Julian Gressel is a person, not an object or an asset. He is by all accounts a great teammate, and he is a wildly important player to Atlanta United because he’s a wildly good soccer player, but also because he is in many ways the face of the team. He has more appearances than any other player in club history, and he connects with the fans. For this, I’m glad he is reportedly closing in on the life-altering financial package that he’s been after.
Julian Gressel has signed a contract with Major League Soccer and up until today, Atlanta United held his player registration rights. This post is about what Atlanta United received in exchange for Gressel’s registration rights, and a framework to think through how the two parties may have arrived at it.
Assets and Trades
All* Major League Soccer teams have to follow the strict and Byzantine MLS Roster Rules to build their teams, and the building of the roster very much involves signing up players in accordance with the rules such that the total of the compensation the players are promised in their MLS contracts does not exceed certain amounts, individually and in the aggregate. Given the strictness of the rules and the “caps” so to speak on player compensation, you could imagine how a team might be said to hold an “asset” on their books for the rights to register a player when that player is making less than his fair value and a liability when a player is making more than his fair value. The roster rules have also effectively established a unit of account (well units), which is the salary cap dollar, whereby MLS pays for most of all of the players’ wages centrally, and each team is allotted salary cap dollars with which to budget all of their individual players based on the players’ contracts with MLS. Further, the rules include certain other units of account which are more or less also salary cap dollars to be used in certain circumstances, and these are tradeable between teams (allocation monies). It is in this way that teams can said to have assets or liabilities that are tradeable, and measured at a fair value denominated in allocation monies.
What is Fair Value?
In accounting and finance principles, “fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement, not an entity-specific measurement, and as such is determined based on assumptions market participants would consider in pricing the asset or liability. In the case of MLS, the teams are the market participants transacting via trade or the exchanging of player registration rights, draft picks, international slots, and/or allocation monies. Fair Value is an exit price (i.e. the price that would theoretically be received to transfer the asset to another party), not an entry price (the price paid to acquire an asset the party already controls).
On December 13, 2016, Atlanta United traded the player registration rights to Donny Toia to Orlando City in exchange for the 8th pick in the 2017 MLS SuperDraft. It then traded in the draft pick to the league central office for the MLS registration rights to Julian Gressel who had signed a contract with the league. The entry price was something like... Donny Toia(?) I guess, but we don’t care about the entry price now. Standing here today on January 21, 2020, Atlanta having just exchanged the registration rights for Julian Gressel with DC United for $750K in allocation monies plus easy-to-reach incentives that will trigger another $250K in allocation monies, it’s clear what the entry-price DC United has paid is (it’s those amounts). But the amount paid is not always equal to the fair value of what exchanged. What was the fair value of Julian Gressel’s player registration rights?
And that’s the -ahem- $1M question, and it’s where the magic happens. Because assuredly when DC United made contact with Atlanta United (or vice versa), both sides would have estimated the fair value of Julian Gressel’s player registration rights and would have begun fighting over just what that amount, in fact, was. Because at the end of the day, we know that Julian Gressel’s player registration rights were exchanged for the exact things in the tweet below, but the question of whether Atlanta United made a good trade or a bad trade depends mostly (although not entirely) upon the estimated fair value of Julian Gressel’s player registration rights compared to the actual monies received in exchange.
A bit more granularity on the Gressel deal. I'm hearing $650k in 2020 TAM, $100k in 2021 TAM and $350k in incentive-based allocation money, $250k of which I'm told is easily attainable. So #ATLUTD likely to get $1 million in allocation money. #DCU— Jeff Carlisle (@JeffreyCarlisle) January 21, 2020
Again, it is the perceived difference between your estimate of the fair value of an asset and the actual transaction price paid that allows for arguments about winners and losers. And that’s relevant!
At time of writing, MLS and Gressel have not yet agreed to a new extended contract. So, to the best of our knowledge Julian Gressel’s contract has 1 year left on it and because he made $133K in 2019, we can guess that unless a new deal is agreed, he’ll probably make somewhere around $160K in 2020. So, a market participant would start by asking itself, what is sort of wage would I need to count against my cap in 2020 for a player who is similar to Gressel. There’s plenty of judgment that goes into this question, but if as a straw-man, I were to sort American Soccer Analysis’ 2019 stats on the sum of expected goals and expected assists for all central midfielders, wingers, wing-backs, and fullbacks, and if I were to grab the 16ish players plus or minus 2.5 xG+xA from Gressel’s 12.7, and I average their 2019 compensation, I get around $950K in compensation for a player of Gressel’s chance creation output. Players like Aleksander Katai and Johnny Russel and Latif Blessing, and Alexander Mitrita pop up in this group. There are many factors that would go into a judgment like this, but trust me, trying this one on for size - this market comparison if you will - is at least informative. See below.
As a starting point, an MLS club who wanted a player with Gressel’s MLS production would need to register a player against the cap at somewhere around $950K per year, but having his registration rights affords them the opportunity to register him and only count $160K against the cap in 2020 (again this first assumes no new contract is signed - just 2020). This looks a lot like the foundations for a fair value around $790K ($950K minus $160K) for an exchange of player rights for allocation monies in Major League Soccer. The theory under this starting scenario is that Gressel plays 2020 then leaves MLS. While he was here, a club who registered a $950K player for $160K against the cap had a benefit of $790K. I’d like to pause and admire how “on the money” that looks compared to the actual Atlanta-DC trade of $750K plus a likely but not certain $250K if incentives are met if you squint. It’s never that simple, but it’s a framework.
Confounding this simple framework however is the surface level fact that reports suggest Julian Gressel and DC United are close to agreeing a deal that will pay the player something like $750K a year over 4 years. You might ask, if players who are putting up similar output in MLS are averaging $950K a year, why is Julian Gressel agreeing to something less? And if DC intends to pay him $750K a year for 4 years, then why are they paying a value that could be approximated by comparing the average $950k market comp to his 2020 current contract salary of $160K in the final year of his current deal?
To continue with the simple framework, if a market participant MLS teams needs to pay a player $3.8M total over 4 years ($950k per year) for a similar level of production as Gressel’s, and they’re able to find a player willing to be paid $3M ($750K X 4), then the value of that player’s registration rights over the 4 yeare period might be something like $800K ($3.8M minus $3M) to that market participant MLS team. Rather than assume Gressel plays out the contract being traded (the first scenario) but instead negotiates a new 4 year deal at $750K per year, we arrive at a very similar fair value estimate as the first one. It appears to work.
As it relates to Julian Gressel and his own motivations, his production might be worth $950K on paper, but in the world of collective bargaining agreements that govern player compensation, if he extends his MLS contract past 2020, because he has an existing contract much lower than that, he may only be entitled to a 25% raise on his 2020 salary of $160K, which is way less than $750K. To get anything more than what he’s owed under the collective bargaining agreement, he would need to posture to suggest he is fully willing to leave MLS at the end of 2020, at which point a team like DC United believing him, might be willing to come to the table and make him an offer more favorable than the the minimum he would collect under the governing CBA. Also, due to the poor leverage situation attached to the CBA, Gressel may be willing to accept less than fair value in order to mitigate the risk of a career ending injury that would take $3M off the table for his family. It appears that something like $1M is a winning number for two different team scenarios, and one which aligns with the players wishes as well. A simple framework but a helpful one.
Just to round out the other scenarios, if a team knew for certain that Julian Gressel would continue playing in MLS for the next 4 years, regardless of whether he got a big new deal or not, perhaps because he wanted to complete the US Citizenship process and play for the USMNT some day, or perhaps because he married a US citizen, then the fair value in allocation monies terms for his player registration rights would be much higher — something like $2.8M ($950K for 4 years minus $160K increased by 25% each year for 4 years). Because Atlanta settled for much less, it tells me they believed the risk of Gressel playing out his contract and leaving MLS at the end of 2020 was a real one, that the threat was credible.
In the end, with the above valuation framework coming out to roughly $800K in two different Gressel contract scenarios, and the actual monies changed hands ranging from $750K on the guaranteed low end to as much as $1.1M on the high end, it would appear that both teams might just arrive at winning scenarios.
Lastly, we can use the above framework to back into what wage Atlanta might have agreed to for a new 4 year deal with Gressel instead of completing the trade with DC United. If Atlanta believed Gressel would walk after 2020 without a bigger deal, and if they ultimately agreed to a deal worth roughly $1M of allocation monies in exchange for the rights to register Julian Gressel for 2020, then we might infer that something like $450K per year would’ve been the breakeven point for agreeing a contract extension with Gressel rather than trading him. ($450K minus $160K = $265K X 4 = ~$1M)