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Today, let’s take a deeper dive into the math and business implications in the wacky world of sports contract buyouts.
Hold on. Yes, I saw you yawning! This will get better (I hope).
Let’s examine the story of NBA guard Kemba Walker (a very nice guy from all I’ve heard) and learn about how contract buyouts work, shall we?
After this 2021 NBA season ended, Boston Celtics guard Kemba Walker was traded to the Oklahoma City Thunder for, in effect, Boston’s first round draft pick in the recently-held 2021 NBA draft. On draft night, Oklahoma City sent that same draft pick (Boston held the #16 overall selection) to the Houston Rockets in exchange for two future picks courtesy of H-Town.
So, that meant that OKC had a 31-year old former NBA All-Star guard in Kemba Walker on the roster along with a couple of future NBA players (courtesy of the Houston Rockets) far down the road. On the surface, I’m thinking “That’s pretty good deal for OKC!”
Now, as a 10-year NBA veteran, Kemba Walker’s most recent contract called for him (regardless of who he plays for) to be paid a reported $74 million over the next two seasons or $37 million per year. That’s a lot of money when the average NBA team paid its players a total of $120 million per year in 2020. In fact, that works out to about $8 million/year /player for a typical NBA roster of 15 players.
Yes, Kemba Walker’s contract is relatively pricey even by current NBA standards.
On the other hand, the Oklahoma City Thunder NBA basketball team (which was founded as the Seattle SuperSonics back in 1967 before moving south to the Sooner state in 2008) missed the NBA playoffs this past season – by a lot! The team went 22-50 in 2020, so a rebuild of this team was definitely in the cards.
That’s why it was surprising to hear that OKC had acquired Kemba Walker but, in reality, the team really didn’t want to keep him in the long-term. The brain trust in OKC felt that there were other NBA teams who might covet the four-time NBA All-Star during this off-season. They were ready to flip Kemba Walker to any other team with the best deal.
Apparently, that never materialized.
Being that Kemba Walker is (a) 31 years of age, (b) coming off a season where he was injured more than once in Boston and (c) has a contract which calls for him to be paid $37 million per season (which comprises 31% of the average NBA team payroll for 15 players), the market spoke loudly this summer by not speaking at all. Crickets, baybee.
Yes, it looks like someone really goofed in the management circle for OKC.
One obvious solution would have been for the NBA Thunder to simply play the veteran Kemba Walker for the next two years. The loyal fans in Oklahoma City might have liked to see how Walker could have helped to improve the home team.
Sorry fans, you simply don’t understand!
The management of the Oklahoma City Thunder made the deal to acquire Kemba Walker with the express intent of flipping him to another NBA team – even hoping they might garner some type of additional consideration (future draft pick, bench player, etc.). Based on the lack of suitors for Kemba Walker over the past month, it’s safe to say that OKC simply blew it.
In order to save face, the management of the Oklahoma City Thunder then discussed matters with Kemba Walker himself. Walker, who grew up in the Bronx, told the team that he longed to play for his hometown New York Knicks.
The Knicks, for their part of this possible transaction, told both parties, “Yes, we’d LOVE to have you on the roster, Kemba. But, sadly, we only have $10 million of salary room available right now. How about $8 million per year?”
Since $37 million (the amount due Walker under his current contract) is $29 million more than the $8 million being offered by the New York Knicks, the three parties had a rather wide gap to bridge.
New York didn’t budge. Their offer was $8 million – take it or leave it.
Kemba Walker didn’t want to budge, but he had always wanted to play in New York for the Knicks. He was negotiable to a certain extent.
That left the Oklahoma City Thunder to make a hard decision.
How badly did they NOT want to pay $74 million over the next two seasons to the former All-Star guard?
Answer: Apparently…a LOT!
According to reports today, the Oklahoma City Thunder is going to “eat” (translated – pay Kemba Walker to go away) about $53 million of the $74 million he would be due over the next two seasons. Plus, Kemba Walker is now released to go play for the Knicks for the $8 million offered. He signed his new deal with the Knicks this week.
If you listen to the sports media spin, Walker just took at $21 million “haircut” by agreeing to this contract buyout ($74 million over two years minus the $53 million paid to him to “go away”).
That’s not the truth, though. Let’s now do the real math.
Kemba Walker received $53 million today to “go away”. If he invests it (pick a nice dividend-paying stock like an electric or natural gas utility) and earns 5% interest on his money, he will make $2.65 million annually on that $53 million principal.
Next, Kemba Walker will make $8 million from the New York Knicks this season and, for the fun of it, let’s say he makes the same amount in Year #2 with New York.
So, when his two years are up, Kemba Walker will have his buyout money from OKC worth $53 million PLUS the $16 million earned from two years playing for the Knicks PLUS another $5.3 million in interest earned ($2.65 million per year). That adds up to $74.3 million at the end of two years for Kemba Walker.
So, that means he could earn $74.3 million versus the $74 million (the original contract to stay and play in Oklahoma City).
Do you think Kemba Walker is happy this week? Yes, indeed!
If you’re a season ticket holder of the Oklahoma City Thunder, you have to wonder why anyone would have made a deal like this in the first place.
Never fear, the management gurus for OKC will say that the team’s payroll for the next few years now be significantly lower so that they will ultimately be able to recoup this reverse-ransom transaction involving Kemba Walker.
To accomplish that goal, it will also mean your remaining basketball team will be utilizing a bunch of bargain-basement priced free agents along with drafted players who are still on their first (rookie) or second contracts with the team.
That also means that the management of Oklahoma City’s NBA franchise is telling fans that the home team isn’t likely to be very good this season and, perhaps, for a few more years to come.
If you’re trying to kill local enthusiasm for heretofore quite successful basketball franchise, the dealmakers in Oklahoma City are doing a fine job right now.
Did I just hear thunder?