City need to give PV assurances and keep him with the club. He's a big name with a big rep and he will be a great coach. Get him working with the first team and move all the other academy coaches up.
If its true that his contract is running out and he's being linked with managerial jobs, isnt it likely that he has made the decision to leave City to secure a job as a manager? Probably with City's good wishes? No big fall out, no drama, just an honest appraisal by both parties that at this point in his career he needs to move elsewhere.