"Skhodran and Arsenal are in agreement. Now the clubs just have to agree a transfer fee," Mustafi's agent Ali Bulut told German website Spox.com with the Gunners in discussions with his current club.
The 24-year-old, who was part of Germany's Euro 2016 squad and scored their first goal of the tournament, can play right-back or centre-back.
Gunners defender Per Mertesacker is out for the near future with a knee injury.
Mustafi, a product of Hamburg's youth academy, joined Valencia in 2014.
He already has experience of playing in England after joining Everton in 2009, as a teenager, for two years before switching to Italian side Sampdoria in 2012.
The son of Albanian immigrants, Mustafi was part of the Germany squad which won the 2014 World Cup and has made 12 appearances for die Mannschaft, netting just the one goal.
