Well, this offer was probably one of Franco's tricks to put pressure over Don Juan and Juan Carlos, I don't think he was seriously going to grant the crown to somebody who had no relation with the legitimate line of succession.
Furthermore, Otto in Spain probably would have suffered the Amadeo syndrome, that is, it would be totally lost in the internal politics and the political infighting amongst the factions of the regime (or famillies, as they were called at the time) The 60's saw a decisive struggle between the catholic sector, led by the Opus Dei, and the nationalist sector, led by Falange, with a clear victory for the former at the end of the decade. Juan Carlos had to surf this struggle, and make choices. He had the double advantage of having good and well connected advidsers and being grown by Franco himself.....