not a stupid idea. awesome idea. i love the old blue's i used to have a series 3 for years.
the issue with blue birds is that the rear ends rip out of them very easily whenever you increase the power, i ripped the diff arms out of my body with a CA20 with a 32/36 webber however i did do lots of burnouts and figure 8's etc with a lock dif.
the motor should fit in with a thermo fan setup i would say, might have to massage the firewall a little but it would be too much of a drama. just watch that rear end, better to make it very strong before you attempt the conversion because it will rip out. S3 rear end 10 bolt diff's are pretty strong and will handle the power for a little. You could also work on a R30 IRS conversion which has been done many times before in those cars as well.
Good luck with it. please keep me up to date with the conversion if it goes ahead!