Chelsea are set to miss out on a £20 million deal for Raphael Varane, leaving Manchester United in pole-position to land Pepe.
Varane has previously emerged as a known target for Varane, however Madrid have rebuffed the offer for a £20 million January move.
Real Madrid head coach Carlo Ancelotti wants to make the 21-year-old the starting centre-half alongside Sergio Ramos, which has left Portuguese defender Pepe in the lurch.
This will seemingly leave United free to land Pepe at a cut price valuation, with Louis Van Gaal keen to bolster his defensive options, ahead of the rest of the Premier League campaign.
Reports in Spain suggest that the winter break could see Pepe leave the Bernabeu, with the 32-year-old also a target for Manchester City.
City boss Manuel Pellegrini wants to partner the defender with captain Vincent Kompany.
by Ben Reardon