The switch reflects a changing investment culture in Japan, where unsolicited, hostile takeover offers were once considered taboo. Their rise comes as the government pushes for better corporate governance, putting management under pressure to improve shareholder returns, especially during buyouts.
"Initially, we thought we could get immediate synergies from the products made by DCM, which runs a similar business to us," Shimachu President Takaaki Okano told a media briefing.
"But we have come to the conclusion that Nitori could help us grow bigger with its expertise originated from its own business model."
Shimachu's shift is also a sign that Japanese management, which has long been protected by cross-shareholdings, is opening up its doors to proposals that could threaten its positions.
Just this week Tokyo Dome Corp, owner of a baseball stadium in Tokyo, accepted an activist proposal to hold an extraordinary shareholders meeting to vote on whether to keep the company's top management.
"So-called hostile takeovers by 'strategic acquirers' such as other listed companies are finally starting to happen in Japan. Slowly they are becoming more accepted by society and appreciated by investors," said Nicholas Benes, head of the Board Director Training Institute of Japan.
Buying Shimachu would give greater presence in Tokyo to Nitori - known for selling items as varied as sofas and kitchen tools at affordable prices - as retailers seek growth even as the novel coronavirus pandemic slows consumption.
Shimachu runs about 60 stores for furniture and home improvement items in the Tokyo region, while Nitori runs about 600 stores.
"Shimachu is attractive because it has stores in Tokyo where population is dense," said Nitori CEO Akio Nitori.
On Friday, Nitori said there was no change in its offer of 5,500 yen per share to buy all of Shimachu, valuing the deal at 214 billion yen ($2.04 billion). DCM, which owns DIY stores nationwide, had bid 4,200 yen in an offer expiring on Monday.
Shimachu said it would withdraw its endorsement of DCM's bid and Nitori said it would launch its tender offer on Nov. 16.
Nitori initially flagged a possible bid to buy Shimachu on the day an investment group backed by prominent activist investor Yoshiaki Murakami revealed it owned 8.38% of Shimachu and considered DCM's offer cheap.
The deal would take spending on domestic acquisitions this year to a 15-year high of $108 billion, Refinitiv data showed. Of that, 13% involved retailers as either suitor or target.
Shimachu's share price ended Friday trade up 0.4% ahead of the announcement at 5,510 yen, just short of Nitori's offer price. Nitori gained 1.5% while DCM added 2.2%.
($1 = 105.1000 yen)
(Reporting by Takashi Umekawa, David Dolan, Elaine Lies and Junko Fujita Editing by Sam Holmes and Christopher Cushing)