well....lets try and give an answer, although this kind of question should probably be asked on the yahoo WIF discussion thread.
In the real world, this would have never happened. Spain was fascist at this point, and besides the opinion of the world community(can you say US entry? i thought you could), Gibralter was never a big goal of the German commanders and especially Hitler. Remember that Hitler was obsessed with Russia, and conquering France was never even a goal of his. That said, it happens all the time in WIF. There are several reasons for this. Like you said, its a great way to seal Gibralter, and without access to quick reinforcements from Britain, Egypt and the rest of the Mediterannean can fall quite quickly. Also, although some people may disagree with me, I dont think Germany has much else to do during the late summer and fall of 1940. With proper builds and plenty of Italian support, Spain isnt that hard to conquer. Of course it also depends on how the CW has been building. 15 land units in Britain with 6 TRNS means you should probably avoid attacking any coastal country(unless your trying to lure the brits into a fight, but the Pyrennes probably arent the best place for that). you can quickly get bogged down in what was meant to be a side theater. We can argue about whethor or not it is a good idea all day, so ill just summerize the important arguements on both sides. on the one hand, any losses before barbarossa and the potential for more US entry (both the DOW and the Support of an Allied minor) is bad if going for Russia. Some players insist that this is the only strategy with Germany, and with a look at their force pools this is definatly warranted. However, if going for a Sea Lion or Southern Strategy, Gibralter is so important that to not take it is almost certain death. However, with both of these strategies, german builds must be changed significantly to the point that Russia on the offense in 1942 is a big threat. As for the Coast, its almost all Mountains, and in exchange for the extra build pts and 2 victory cities its almost always worth it. So basically it comes down to when you plan on barbarossa, if ever, and what your overall strategic goals are as the Western Axis.
note that control of Spain in no way gaurantees the capture of Gibralter. especially if the CW builds a fort here, Gibralter can very quickly become the world greatest fortress. the only real way to ensure its capture is to have firm control of Cape St. Vincent and the Western Med and to OOS disrupt its defenders. If the CW puts an HQ with a supply unit there, even this wont work. so spain is only worth attacking if the situation permits it. thats one of the best parts of WIF. there is no one fool proof strategy, because all strategies have a counter-strategy.
Member #3 of the EBEA
Comrade #4 of the e-Socialist Liberation Army