The Ivory Coast international has agreed a move to El Madrigal just a day after Gabriel Paulista left Villarreal to join Premier League side Arsenal.
The 20-year-old has signed a five-and-a-half-year deal with Marcelino's side and will link up with his new club when he returns from the Africa Cup of Nations.
A statement on Villarreal's official website said: "Villarreal and Espanyol have reached an agreement for the transfer of young central defender Eric Bailly, who will play with the Yellow Submarine for the next five and a half years."
Bailly has made just five appearances for Espanyol in La Liga this season, with his first start coming against his new employers back in November.
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