UPDATE 3-Saab wins Brazil jet deal after NSA spying sours Boeing bid

BRASILIA/SAO PAULO, Dec 18 (Reuters) - Brazil awarded a $4.5 billion contract to Saab AB on Wednesday to replace its aging fleet of fighter jets, a surprise coup for the Swedish company after news of U.S. spying on Brazilians helped derail Boeing’s chances for the deal.

The contract, negotiated over the course of three presidencies, will supply Brazil’s air force with 36 new Gripen NG fighters by 2020. Aside from the cost of the jets themselves, the agreement is expected to generate billions of additional dollars in future supply and service contracts.

Saab did not immediately comment on the purchase. In addition to Chicago-based Boeing Co, France’s Dassault Aviation SA was a contender for the contract.

The timing of the announcement, after more than a decade of off-and-on negotiations, appeared to catch the companies involved by surprise. Even Juniti Saito, Brazil’s top air force commander, said on Wednesday that he only heard of the decision a day earlier in a meeting with President Dilma Rousseff.

Brazilian officials said the deal, one of the most coveted emerging-market defense contracts, went to Saab because it provided the most affordable option for the new jets, as well as the best conditions for technology transfer to local partners.

The choice, Defense Minister Celso Amorim said, “took into account performance, the effective transfer of technology and costs - not just of acquisition but of maintenance.”

Until earlier this year, Boeing’s F/A-18 Super Hornet had been considered the front runner. But revelations of spying by the U.S. National Security Agency in Brazil, including personal communication by Rousseff, led Brazil to believe it could not trust a U.S. company.

“The NSA problem ruined it for the Americans,” a Brazilian government source said on condition of anonymity.

A U.S. source close to the negotiations said that whatever intelligence the spying had delivered for the American government was unlikely to outweigh the commercial cost of the revelations.

“Was that worth 4 billion dollars?” the source asked.

The lament echo’s recent complaints by Cisco Systems Inc , which said in November that a backlash against U.S. government spying contributed to lower demand for its products in China.

In a statement, Boeing called Brazil’s decision a “disappointment,” but added that it would continue to work with Brazil to meet its defense requirements.

Dassault, for its part, said it regrets Brazil’s decision and called Saab’s fighter an aircraft that was inferior to its Rafale jet.

“The Gripen is a lighter, single engine aircraft that does not match the Rafale in terms of performance and therefore does not carry the same price tag,” it said.

Saab says the Gripen NG has the lowest logistical and operational costs of all fighters currently in service.

Brazil coexists peacefully with all of its South American neighbors and has no enemies elsewhere. The country, however, is eager to fortify its military as it considers the long-term defense of its vast borders and abundant natural resources, including the Amazon rainforest and offshore oil discoveries.

“We are a peaceful country, but we won’t be defenseless,” Rousseff said on Wednesday at a lunch with senior officials from Brazil’s military, where she said the announcement was forthcoming. “A country the size of Brazil must always be ready to protect its citizens, patrimony and sovereignty.”

Sweden’s defense minister, Karin Enstrom, said in an interview that the contract, “is a sign that the Gripen is a well-functioning system which is cost efficient.”

Under the terms of their agreement, Brazil and Saab will now finalize contract details within a year. The first jet is expected to be delivered two years later, with about 12 of the aircraft expected annually after that.

Brazil’s decision unexpectedly wraps up a tortuous and prolonged decision-making process that had made the negotiations the object of ridicule in some defense circles.

However, the deal was taken very seriously by the competitors.

French President François Hollande personally lobbied for Dassault last week during a state visit. Boeing, for its part, was so committed to winning the contract that it opened a big corporate office in Brazil and named Donna Hrinak, a former U.S. ambassador to the country, as its top executive there.

The timing of the announcement surprised many analysts, who believed that the slowdown in Latin America’s biggest economy, coupled with Rousseff’s expected bid for re-election next year, would delay the purchase until 2015.

Indeed, the decision coincides with pressure on Rousseff from economists, the private sector and political opponents to curb public spending. Having initially increased government spending in efforts to spur growth, the president now faces growing criticism because of stubborn inflation and a worsening outlook for the country’s budgetary targets.

Still, the country’s current fleet of Mirage fighters, which the new jets will replace, is so old that the air force this week is taking them out of service. And Brazil’s government said the money to pay for the jets would not come out of the budget until 2015, after the contract is finalized.

Analysts said the Gripen’s cost advantage stems from its relative simplicity compared with the other jets.

“The Gripen is more accessible in terms of technology,” said Richard Aboulafia, an analyst at the Teal Group, a Virginia-based research company for aerospace and defense. “It’s something Brazil could conceivable build itself.”

At the briefing in which they announced their decision, government officials said Brazilian aircraft maker Embraer SA would be Saab’s principal partner. The transfer of technology is crucial to help Brazil develop future generations of fighter aircraft.

“There isn’t necessarily a need to produce all the parts in Brazil,” Amorim, the defense minister said. “What’s important is that specific aviation technology is transferred to Brazil so we can develop it.”

The delta-winged Gripen, Swedish for Griffin, was first introduced into service in the late 90’s and is currently flown by the Swedish, Hungarian, South African, Thai and Czech air forces, according to the company’s website.

Saab shares rose 1.84 percent to 133 krona on Wednesday, their highest close in 10 days. Earlier in the day, they rose as much as 5.7 percent to 138 krona, the highest in five months.

Boeing shares fell 0.13 percent to $135.70 in New York, while Dassault Aviation shares fell 0.4 percent to 920 euros in Paris.