Warren Buffett, Coca-Cola's largest shareholder, engages in some friendly sparring with PepsiCo CEO Indra Nooyi.

This is part six of the transcript and video of Warren Buffett's 'Ask Warren' appearance on CNBC's Squawk Box on Monday, March 1, 2010.

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QUICK: Good morning again, everyone, and welcome back to SQUAWK BOX here on CNBC, first in business worldwide. I'm Becky Quick in Omaha, Nebraska, this morning. This is Piccolo Pete's restaurant, and that means we are on Warren Buffett's home turf. This is a place that Warren brings many of his friends, names you know; people like Bill Gates and GE CEO and chairman Jeff Immelt.  Joe Kernen and Carl Quintanilla are back at CNBC world headquarters this morning, and we have one more hour left to get most of your e-mail questions for the legendary investors, following up on that annual Berkshire Hathaway shareholder letter. We've covered a lot of topics so far, a lot of ground, everything from the markets, the government and Coca-Cola's bottling deal. But, Joe, we have much more to come.

KERNEN: Yeah, we do. Warren is Coke's largest shareholder. We're going to introduce him to Ms. Pepsi in a moment. PepsiCo CEO Indra Nooyi will talk to us exclusively after just, coincidentally, those bottling deals, PepsiAmericas and PBG, both closed today.

QUINTANILLA: Yeah, reaffirmed guidance. Or affirmed guidance.

KERNEN: And this was--I know she may take a little bit of a victory lap. I mean, she won--she's already closing the deal, as Coke is barely scratching...

QUINTANILLA: Where have you guys been?

KERNEN: Yeah. You know, they're trying to catch up.

QUINTANILLA: Copycat.

KERNEN: I don't--yeah, yeah. Oh, `What's Indra doing? Let's--what else can we'--no.   You've got the headlines, though, for us, right?

QUINTANILLA: I do, a couple quick headlines today.

(News headlines)

KERNEN: Let's get to this, PepsiCo

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[PEP  Loading...      ()   ] announcing the completion of its mergers with its two largest bottlers, Pepsi Bottling Group and PepsiAmericas.   Joining us now in a special SQUAWK exclusive, live from their headquarters in Purchase, New York, Indra Nooyi, PepsiCo chairman and CEO.  It's always great to see you, Ms. Nooyi, and...

INDRA NOOYI (PepsiCo Chairman and CEO): Good to be here, Joe.

KERNEN: And do I--can--I guess I congratulate you, not only on the completion of the merger, but, you know, on doing it so much sooner then Coke

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[KO  Loading...      ()   ]. Can you--can you go into some details on what it does for Pepsi and how it's going to help, I guess, rationalize the assets? That's what Warren called it.

NOOYI: Well, you know, Joe, as you know, we announced this deal in April of last year, and we are bringing in Pepsi Bottling Group and PepsiAmericas into PepsiCo. Today's the first day of the new PepsiCo--the new PepsiCo, which is about $60 billion in revenue. And, you know, it's full operational control of almost 80 percent of the bottling system. And as we mentioned in our call in April when we first announced the deal, the beverage business in North America has changed substantially over the last decade or two. It's not growing as much. And the nature of the business itself has gone from a few megabrands to a bunch of fragmented new products, noncarbonated vs. just carbonated drinks. And the old model of separating the franchise company from the operating company became almost a relic of the past. And last year, when we were looking at the dynamics of the industry and looking at where it was evolving to, it became clear to us that this separation of the franchised company and the bottling company wouldn't last. And a franchised company cannot grow at the expense of the bottling company, and a bottling company clearly cannot grow unless it has the support of the franchise company. So we decided to put the profit pools back together.  The good news is as of Friday the deal as closed, which means today is the birth of a new PepsiCo, and we are very optimistic about our prospects. Our press release this morning indicated that for the next three years we expect low double-digit EPS growth, which in today's times is pretty good. And in 2010 we reiterated 11 to 13 percent EPS guidance.

KERNEN: All right. I kind of understand a lot of that, how, you know, you don't want the two companies competing. But there was a rationale at one point to do it that way, and Mr. Buffett had pointed out the different--you know, it's a low margin bottling business vs. a high margin syrup business.  What exactly changed? Why--you are going to deploy more capital--or you have deployed more to own the bottlers. Why not leave them owned by someone else with a lower margin business? What's changed? You say something's changed to make it make more sense.

NOOYI: Yeah, that's a great question, Joe. So 10, 20 years ago, the market--the beverage market in North America was essentially carbonated soft drinks, and there were a few megabrands that controlled the business, and the market was growing 6, 7 percent in terms of volume. Fast-forward to today.  Carbonated soft drinks are now less than 50 percent of the total market, and that's a very highly profitable part of the whole market. And the overall liquid refreshment beverage business is growing in volume about minus 2 percent and in value about 1 percent positive. So this is not a huge growth business. It's a big market, it's about $100 billion category. But it's not growing in leaps and bounds like it used to a couple of decades ago. When you have one or two publicly listed companies positioned as growth companies trying to fight over a profit pool, that's not a very good situation, especially if the profit pool is not growing enough to feed the appetites of two or three publicly listed companies. So the only way to compete and stay ahead of competition in this environment is to bring the profit pools back together and figure out how to operate more efficiently.  And I go back to a point that Warren made, and if I may digress for just a bit, it's a privilege to be on this show with the Oracle of Omaha. Warren, it's unfortunate that you and I haven't met, but I know everybody around you, so I feel like I know you. It's an absolute joy and privilege to be on the show with you. And thank you for sharing some of your time with me.  But let's come back to the bottling transaction. Warren said something very important in one of the early segments. He said it's a operating intensive business and it's a lower margin business. And, you know, companies will have trouble integrating the bottling company into the franchise company. I think the big advantage PepsiCo has here is because of Frito-Lay North America and the overall salty snack business around the world, we are an operating company. We operate 18,000, 20,000 routes in Frito-Lay. We never lost that operating discipline. And so the post...(unintelligible)...integration of bottling into PepsiCo was a breeze. We got it done flawlessly. And we had the wonderful advantage of retaining Eric Foss to run our bottling business.  Eric used to be the CEO of PBG. We retained him. And so it's almost like bringing all the bottling people back home to PepsiCo. So we feel great about our prospects, and we think it's just reuniting a company that was always peripherally part of PepsiCo.

KERNEN: Yeah, I want to definitely get Becky and Warren Buffett in on this.  You know, Warren, if you didn't have such a long and fruitful relationship with Coke, Pepsi's right in your wheelhouse. I think the way the company's run, the products that it has. Are you precluded in some kind of antitrust from owning both, or?

BUFFETT: No, I don't think the government would come after me.  It--Pepsi--it's a wonderful company. And particularly, I mean, Frito-Lay is a fabulous business. I'd love to own it. I eat Fritos, I eat Cheetos, I eat their potato chips; I even eat Munchos, which are kind of hard to find. But I always drink Coca-Cola with them.

NOOYI: You know, Warren, I read your book, the biography on you, and it said that you started life drinking Pepsi, and those were the most joyful moments in your life. I loved that. I think that's what keeps you so youthful, because Pepsi's about youthful cultures.

BUFFETT: Well, I happen--I have to say, Indra, that I started drinking Pepsi when I was about six or seven years of age in the '30s. And if you remember, at that time it was twice as much for a nickel, too. Pepsi gave you 12 ounces for a nickel...

NOOYI: Uh-huh.

BUFFETT: ...and Coke gave you six and a half ounces. So I would definitely say that at half the price, it--Pepsi was a good buy at that time, marked down 50 percent.

KERNEN: I...

NOOYI: Warren, let me assure you, at any price, Pepsi's a great product.

KERNEN: Yeah. All right, now I--now I understand, you were able to--Warren, you're going to buy the--to drink you're going to buy the cheaper soft drink, but to buy the company, you're going to buy the one that charges twice as much. It makes perfect sense now, now that I see how your--how your mind is working.

BUFFETT: Joe, let me--Joe, there's a comic book--Action Comics was the first Superman book that sold for a dime in 1938, and it now sells for a million dollars. And if Pepsi were half the price, you know, I--all I had to do was at, you know, in effect, save an extra nickel there twice. And that 10 percent--that 10 cents turning into a million, though, incidentally, is only a 25 percent compound. It's kind of interesting. If you'd bought that comic book in 1938 and compounded your money at 10 cents at 25 percent, you'd have a million dollars now without owning the Superman comic.

KERNEN: Wow, that's...

BUFFETT: So I had a very good reason to try and save money when I was eight years of age. And 12 ounces for a nickel was different than six and a half ounces.

KERNEN: Hey, Indra, you know, Coca-Cola I think is leaving the--some of the nondomestic bottling assets separate. Is that because over in Europe and Asia, that things are still growing quickly enough? Is it the same with Pepsi, where you still have the--that rapid growth which allows that model to make sense?

NOOYI: Well, Joe, you know...

BUFFETT: Are you asking--go ahead.

NOOYI: ...east of the Middle East, as I said, the--go ahead, Warren.

BUFFETT: No, I think he was directing at you, Indra. No, go ahead.

NOOYI: No, east...

BUFFETT: I'm saying...

NOOYI: I'm sorry.

KERNEN: I want both of you to answer.

NOOYI: East of the Middle East, the markets--east of the Middle East, the markets are still growing extremely rapidly, Joe. And, you know, the first thing I should say to you, the companies are very different. We are a large food and snack business in addition to beverages, so the two companies, you really can't compare them directly. East of the Middle East, the economies are doing quite well. How long that'll continue, we'll have to watch and see, but they're doing very, very well. I think Western Europe and Eastern Europe are still troubled markets. GDP's down, unemployment rates are extremely high, and I don't think you can link a bottling transaction to the economy. You know, they had a different strategy, we had a different strategy. But in Europe we are a very, very large food and beverage company because we have a large snack business, we have a huge juice business. We are huge in Russia, we're huge in Western Europe. So I think the companies are very different and our strategies, fundamental strategies are very different.

KERNEN: Warren, you were going to talk about the Coke strategy abroad, right, with their--I guess they're not buying in those assets, right?