Zabeel Investments, a Dubai-based fund, is considering whether to lift its offer for Morgans Hotel Group after the board of the luxury hotel group rejected its $1.4 billion (£796 million) bid last week.

The Times understands that David Hamamoto, the Morgans chairman, notifed the sovereign wealth fund that its indicative offer of $22 a share for the Nasdaq-listed company had been unanimously rejected by the board.

Zabeel, which declined to comment, is understood to be perplexed by the rejection, given that the shares were trading at less than half that level in July. Morgans was floated two years ago at $20.

Some investors contacted by The Times are considering forming a shareholder action group. One institutional shareholder said: “The only way such a rejection would be justified would be if there was a higher offer on the table from another party.”

A leading American hedge fund with a large holding said: “We're going to talk to other investors about setting up an activist group. Unless the board have another offer or something else up their sleeves, I can't see shareholders letting them get away with this.”

Mubadala, an Abu Dhabi fund, is known to have looked at Morgans. It has completed limited due diligence but has not made a firm proposal. Mohamed Amasha, Mubadala's spokesman, declined to comment on a possible bid, calling it a market rumour.

Zabeel is believed to remain interested in the company, but is said to be unwilling to stage a hostile takeover.

Morgans, which was founded by Ian Schrager, operates ten style-led hotels, including the Clift in San Francisco, the Royalton in New York, the Delano in Miami and the Sanderson and St Martins Lane hotels in London.

The board has outlined plans to turn the Delano and Mondrian concepts into international brands, announcing a project to develop a Delano property on Dubai's waterfront of about 200 rooms and 100 branded residences.

Morgans, which could not be reached for comment, is understood to believe that its expansion plans will deliver much greater long-term value to shareholders than Zabeel's bid.

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