They might need him, but they aren't willing to spend all that money on him considering that they have Modric and Kroos in midfield. I am sure that they would have loved to sign him if he was cheaper, but you don't spend 120m euros on a player who plays in midfield, if you already have two world class midfielders.
For example, if some top CB became available when we had Vidic and Rio, we would have liked to sign him, but not if the price was ridiculous. Some other club with the same finances however would have signed him even for a very large price if they didn't have any top CB.
However, it is good to see for once getting a player that Madrid were very interested on and have been planning for years to sign him.