Isco Alarcón wants to join Real Madrid, not Manchester City. Both Málaga and Real Madrid know that, and that's why los blancos are trying to lower the price. Málaga are in a desperate need of money, and they won't play any European competition after UEFA suspended them for one season because of their financial troubles.
The transfer could be announced as soon as Ancelotti signs for Real Madrid. It seems that the Spanish club will also try to offer the loan or transfer of some players like Callejón, Nacho or Cheryshev to make the 20M€ offer more appealing.
Isco won the 2012 Golden Boy Award, joining the likes of Messi, Götze, Rooney or Fàbregas, also winners of that award given to U21 players. He's one of the most promising players in the country and has shown his quality in the U21 Eurocup played at Israel. He's also a versatile player that can perform in both wings and in Özil's position as well.
If Isco signs, expect either Kaká or Di María to leave the club.
You can watch some highlights of Isco's season here: