Lockheed Martin has entered into an agreement to separate and combine its Information Systems & Global Solutions business with Leidos Holdings, Inc.

The $5 billion transaction includes a one-time $1.8 cash payment to Lockheed Martin, which the company says it plans to use to repay debt, pay dividends, and repurchase its stock. Lockheed Martin stockholders will receive 50.5 percent equity in Leidos, worth approximately $3.2 billion. Leidos' shareholders will hold the remaining 49.5 percent of shares.

Lockheed Martin chairman, president, and CEO Marilyn Hewson says the transaction is beneficial for both companies.

"This strategic transaction is an important milestone in the portfolio reshaping strategy we announced in July 2015 and allows us to focus on our core business in aerospace and defense," Hewson said in a statement. "The combination of our proven IT and technical services businesses with Leidos will create a new leader in the government IT sector with a diversified portfolio, greater scale and improved efficiency."

The agreement, which would create the largest U.S. government services provider, is subject to regulatory approval, and is expected to close in the third or fourth quarter of 2016.