French drugmaker Sanofi-Aventis is likely to extend its $18.5 billion tender offer for Genzyme one last time as it seeks to buy the U.S. maker of drugs for rare diseases, sources close to the situation told Reuters.

The $69 a share tender offer expires at the end of the day on Friday, New York time. It was extended once in December when Genzyme investors handed in barely 1% of their shares.

Now that the two companies are talking directly, fund managers and sources familiar with the matter see an extension as a formality, allowing the companies to get closer and likely turning Sanofi's hostile offer into one Genzyme's board can recommend to its shareholders.Genzyme Corp Chief Executive Officer Henri Termeer said he expects a deal "will work itself out." Speaking at the Greater Boston Chamber of Commerce on Wednesday, Termeer said Sanofi's approach is "very honest" and "a great compliment."

Genzyme currently trades closer to $72 per share, on the assumption that Sanofi will have to raise its bid, Some investors expect a deal in the high $70s or possibly even $80-per-share level, depending on how it is structured.

"A lot of progress has been made in the negotiations," said a source close the talks, adding it was impossible yet to tell whether they would lead to a quick break-through or drag on. "In negotiations, the last mile is the most complicated."

Sanofi revealed roughly a week ago that discussions were progressing, moving up from financial advisors to also include company officials. But it warned that both sides disagreed on the bid's value and terms of a potential extra pay-out, or contingent value right (CVR), tied to Genzyme's experimental multiple sclerosis drug.

"The importance of the (January) 21st (deadline) has been substantially reduced now that they seem to be working towards an agreed deal," said Marc Booty, investment manager at Pictet Asset Management which owns Sanofi stock.

"I'm guessing they'd like to get an agreement sooner rather than later. This is an overhang and distraction for both sides."

The two sides broached the subject of a CVR to break months of deadlock after Sanofi Chief Executive Chris Viehbacher met Genzyme'sTermeer in September and failed to agree on a framework for talks.

But a final agreement may not include such a payout in the end. Termeer said on Wednesday that at the very least, talks on a CVR were proving useful in establishing the right value for Genzyme.

"If we do have a transaction, we will have a transaction for the right reasons," Termeer said in Boston. "Both sides have said it will take some time," to understand the proper value of the U.S. biotech.

CVR as Vehicle Rather Than Solution
The prospect of a CVR was also raised in merger talks between Roche and Genentech as the two disagreed over the potential value of Genentech's cancer drug Avastin.

In the end, a deal was struck without a CVR. One source familiar with the situation said a similar turn of events could occur in the Sanofi-Genzyme negotiations.

In Genzyme's case, the CVR discussion has both kindled hopes that a deal could be reached, and raised concerns among Sanofi investors that it could pay too much, especially if it offers both a cash sweetener upfront and a CVR.

"I would hope, all else being equal, that a renewed offer that is deemed acceptable by the Genzyme board does not contain both a large uplift in cash and also the inclusion of a potentially valuable CVR," said Iain Galloway, European equities investment director at Standard Life Investments.

"A CVR may help bridge the gap between the opinions of the boards, but gives away the upside.... to the detriment of Sanofi owners," Galloway said. Standard Life is a top 40 Sanofi shareholder.

Genzyme's stance has also softened in the absence of any interest from a rival bidder and its efforts to fix a manufacturing crisis that led it to cut its earnings forecasts again this month.

"We believe we are approaching a happy end. We think that Sanofi will extend one more time to take time to seal the deal," said Lionel Melka, co-manager of Bernheim, Dreyfus & Co's Diva Synergy Fund which owns Genzyme shares.

He expects a deal by the end of February at $74-75 per share in cash, plus a CVR of $5-6 per share.

In any case, Sanofi has the financing in place from JPMorgan Chase, BNP Paribas and Societe Generale and also has regulatory approval for the takeover.