Manchester United's move to sign Pepe from Real Madrid will scupper Chelsea's attempts to sign Raphael Varane from the Spanish giants.
The Blues have been heavily linked with Varane in recent months, and with the French international down the pecking order at the Bernabeu it seemed as though they would have a good chance of getting their man.
A price of around £20 million had been quoted for the talented youngster and Chelsea were said to be gearing up for a January , however the deal appears to be dead in the water with the news of Manchester United's interest in Pepe.
The Express report that that Real Madrid boss Carlo Ancelotti would prefer to let Pepe leave and open up a space for Varane in his starting line-up, so will commission a deal for the Portuguese international to leave.
Manchester United are in desperate need of more bodies at the back after seeing their back line decimated by injuries this season. That has only served to highlight the fact they are short of options having failed to replace both Nemanja Vidic and Rio Ferdinand before the start of the season.
However the Red Devils won't have it all their own way, with Manchester City also believed to be in the running for Pepe's services too. Manuel Pellegrini seemingly has an opening for a centre-back, and could make a move if he is still in the job in the new year.
The update is likely to frustrate Chelsea boss Jose Mourinho, who is a keen admirer of Varane. the Special One game Varane his debut during his time in charge of Real Madrid, and would dearly like to be reunited with the talented youngster.
Chelsea captain John Terry could well leave at the end of his contract in the summer, which means Mourinho will likely keep his eye open for other options.