Liverpool have agreed a deal in principle with Schalke to sign central defender Ozan Kabak on a six-month loan with an option to buy, according to Sky in Germany.
The 20-year old Turkey international has already undergone a medical in Germany and is expected to fly into Merseyside in the next hours.
Schalke were unwilling to let Kabak leave without a replacement and have moved to secure Arsenal defender Shkodran Mustafi on a six-month deal.
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Schalke will pocket an initial loan fee of £1m, rising to £1.5m in potential add-ons depending on appearances and Liverpool's performance in the Champions League.
Liverpool will retain an option to buy in the summer worth an initial £18m, which could rise to £26.5m with add-ons, and will have until June to trigger that clause.
Kabak was on Liverpool's radar last summer and is a long-term target of the club's recruitment team.
Former Schalke and Huddersfield boss David Wagner strongly recommended the 20-year-old to Jurgen Klopp over the past 12 months, as well as Klopp's close friend and former Schalke sporting director Christian Heidel.
It is understood Liverpool favoured an initial loan deal in order not to present any long-term obstacles to Nat Phillips and Rhys Williams' pathway at the club.
Schalke paid £13m for Kabak in 2019 and he is currently contracted to the Bundesliga club until 2024.
Sky in Germany report Shkodran Mustafi is negotiating an early termination of his Arsenal contract which is due to expire in the summer, allowing Schalke to sign him on a free transfer with a small compensation fee to the Gunners.
Mustafi, who has 20 caps for Germany and was part of their 2014 World Cup-winning squad, has fallen out of Mikel Arteta's plans at the Emirates Stadium this season.
Liverpool have also brought Preston defender Ben Davies to Anfield on a long-term contract in a £1.6m deal.
The Premier League champions are set to send 19-year-old centre-back Sepp van den Berg to Deepdale on loan until the end of the season as part of the deal.
Liverpool have paid £500,000 up front for Davies but Preston could receive add-ons totalling up to £1.1m, while the Championship club will also retain a 20 per cent sell-on clause on the defender.
The Reds' move for Kabak came after they failed in an attempt to sign Marseille centre-back Duje Caleta-Car.
Liverpool were understood to have agreed a deal with the Ligue 1 side for the 24-year-old Croatia international, who has been a regular under Andre Villas-Boas this season.
However, Marseille are believed to have pulled out of the deal amid concerns they could not sign a replacement for Caleta-Car before Monday's transfer deadline.
'A huge potential': The view from Germany
Sky in Germany's Max Bielefeld:
"There are some question marks from English fans about Kabak but he's one of the most talented young centre-halves in the Bundesliga.
"Schalke have been in a state of crisis for a number of months so it's not been easy for Kabak, but he's really physical, good in the air and is really good in one-v-one situations.
"Jurgen Klopp has followed him for quite some time and they contacted the club last summer for a deal but it couldn't be reached back then. He's only 20 so he's got time to develop and I feel it's a good fit.
"Even if the other players do come back from injury, you have got a young player in Kabak who will be able to develop in the coming years.
"There are some who feel he will become a world-class defender. He has a huge potential."
'Kabak's agent should get knighted'
Sky Sports' Paul Merson:
"I feel they are just bringing a couple of bodies in. When Fabinho got injured, I feel that was the moment where they had to drop Jordan Henderson into defence. It's just a case of getting bodies in. The top-drawer out there are going to be £70m-£80m players.
"When you buy them, they will be on between £100,000 and £200,000-a-week. They won't be playing in six months when Virgil van Dijk is fit and Joe Gomez is a very good player who will be one for the now. We can all spend the club's money but at the end of the day, it's a business. They are not expensive.
"The lad at Schalke won't believe his luck. If you are his agent, you would be looking to get knighted! He has just gone to the champions... they have just one won game all season! That really did shock me. The lad at Preston is a decent player but it's a massive jump. It's just a case of getting bodies in."
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