I find this very inspirational - that is the highest mileage I've seen on a 116 engine. the PO must have taken very good care of it. I am rebuilding an engine that I believe has ~100K EXCEPT for the holes and bearings, and I hope to get 250-300K before it needs a short block rebuild.
Do you know if it ever had a valve job? Does it smoke all the time or just a lot on start-up?
Unless the car is in INCREDIBLY well maintained condition (and at that mileage, things that you don't think wear out do), I doubt if it is worth a rebuilt engine. It is getting tougher to do, but there are still engine blocks from late 80's/early 90's SEL's with <125K miles that can work, if the oil pans and oil filter pedestals are swapped. The 420SEL has a 380's M116 short block bored out a bit and with a little higher compression. You won't wind up with a performance car out of this, but it will be drivable and a little faster than a 380...
Swapping in a 560 is much more involved because of the control systems involved - people on the W126 forum have done it but actually acquiring a 560SL or SEL is easier...