The Toffees believed they were close to landing the 21-year-old midfielder, who was impressive during a loan spell at Goodison Park last season.
But now Fernandes, a product of Benfica's youth academy, is set to sign a six-year deal at the Mestalla.
A statement on Valencia's official website on Sunday revealed: "Valencia have reached an agreement during this morning, pending medical tests, for the signing of Portuguese midfielder Manuel Henrique Tavares Fernandes for six years with a buy-out clause of 60 million euros.
"The 21-year-old midfielder, a product of the Benfica youth academy, will be presented in the next few days by the Mestalla club."
The fee for Fernandes is somwhere around 15million Euros (£10million), according to reports in the Spanish media.
Fernandes watched from the stands as Everton drew 1-1 with Blackburn on Saturday.
He had already successfully completed a medical at Goodison Park, and the contracts - which included issues of third-party ownership - were being studied by Premier League officials.
And as late as Friday the club were expecting clearance for Fernandes to be in their squad for the Blackburn game.
But the whole deal has been turned on its head, even though Everton had actually agreed to meet the asking price for 100 per cent of the player.