Herzog will not be Prime Minister. It’s extremely unlikely. No one would even be considering this seriously if he hadn’t merged with Livni’s party, artifically making his party the biggest. It’s thus absurd to talk about Netanyahu “losing” the election just because his party gets a less seats than Labor-Livni.
The real question is whether Netanyahu will form a right-wing coalition or a centrist coalition with Labor-Livni, shutting out the right-wing and religious parties. I think he’d rather do the former, and given current polling, he’ll be able to. It seems his big priority now is security issues, and the right-wing parties are his natural allies for that. He’ll have to take UTJ on board, though, so don’t expect to see more laws targeting the charedim.