I don't watch the Portuguese league, but i doubt Villareal are a better team than Porto is. I also don't understand what you're basing your opinion on Villareal on. You're putting them above Arsenal and Porto on the basis of what exactly?
I believe that Porto doesn't stand a chance against Manchester. I see Porto as the only team sure to be eliminated in this round. That's why i found it logical to put them on the last place.
Arsenal and Villareal, eventhough big outsiders against Manchester, could still hurt the Mancs and they proved this year that they can do it. Arsenal beat ManU 2:1 while Villareal played 0:0 on the last 4 matches against ManU, and what's much more important, this current team of Villareal was the same one that played 0:0 with ManU twice this season. When was the last time some team (especially with such an awful defense, as you say) managed to hold ManU goalless in 180 consecutive minutes?
So, i explained why did i put Villareal above Porto. Now i will tell you why did i put them above Arsenal.
I see these teams more or less at equal level. Sure, an Arsenal in top form, with Fabregas and Adebayor fit and in top form and with Arshavin eligible to play, would be my favorite, but that's not the case this time. This Arsenal is easily beatable, while Villareal proved many times that they know how to play against the English and they know how to stop the English teams.
Both teams are fighting for the 4th place in the league (they're both 4th atm) so no advantage here because both teams still have to fight on more than 1 front. Still, that 4th spot is a MUST for Arsenal and they must concentrate more there, while for Villareal a CL 1/4 final is a rare oportunity and they will die on the pitch if they have to, they will risk in the domestic league, but they will kill to stay more in Europe.
I decided to give a slight advantage to Villareal because they will have that extra motivation when they think about Riquelme's missed penalty.
More or less, it's equal, but some minor details made me give minor advantage to the Spanish team.
In reality, i can't see any of these teams winning the CL.