OK, I have continued my investigation, and I think this is a bug in UE related to how mesh data gets handled either by the Panel Cloth editor or the Unreal mesh editing tools.
I found another of my models that was pretty small and gave only one “coincident vertices” error. I opened it in Blender (could not merge any vertices by distance again) and looked for the triangle with the vertex numbers 610, 612, 607 that is supposedly with coincident vertices, which leads to a failure when generating the skinning data. And guess what! There is no such triangle in the entire mesh.
Attached is a screenshot from some two of the three vertices I found, namely 607, 610 but they are not connected to 612 which is much further downstream in the topology. The triangle referenced in the UE error output simply does not exist. You can see in the screen all the neighboring triangles.
If anyone from Epic Games reads this, I am happy to provide my mesh and some info about the creation process.
I have wasted two hours trying to merge vertices when in fact this is not the problem.